Non-controlled Businesses That Leave Us Comfortable
Last year I
mentioned two of Berkshire's long-duration partial-ownership positions -
Coca-Cola and American Express. These are not huge commitments like our Apple
position. Each only accounts for 4-5% of Berkshire's GAAP net worth. But they
are meaningful assets and also illustrate our thought processes.
American
Express began operations in 1850, and Coca-Cola was launched in an Atlanta drug
store in 1886. (Berkshire is not big on
newcomers.) Both companies tried expanding into unrelated areas over the years
and both found little success in these attempts. In the past - but definitely not now - both were even mismanaged.
But each
was hugely successful in its base business, reshaped here and there as
conditions called for. And, crucially, their products "traveled."
Both Coke and AMEX became recognizable names worldwide as did their core
products, and the consumption of
liquids and the need for unquestioned financial trust are timeless essentials
of our world.
During
2023, we did not buy or sell a share of either AMEX or Coke - extending our own
Rip Van Winkle slumber that has now lasted well over two decades. Both
companies again rewarded our inaction last year by increasing their earnings
and dividends. Indeed, our share of AMEX earnings in
2023 considerably exceeded the $1.3 billion cost of our
long-ago purchase.
Both AMEX
and Coke will almost certainly increase their dividends in 2024 - about 16% in
the case of AMEX - and we will most
certainly leave our holdings untouched throughout the year. Could I create a better worldwide business than these
two enjoy? As Bertie will tell you: "No way."
Though
Berkshire did not purchase shares of either company in 2023, your indirect ownership of both Coke and AMEX
increased a bit last year because of share repurchases we made at Berkshire.
Such repurchases work to increase your participation in every asset that Berkshire owns. To this obvious
but often overlooked truth, I add my usual caveat: All stock repurchases should be price-dependent.
What is sensible at a discount to business-value becomes stupid if done at a
premium.
The lesson
from Coke and AMEX? When you find a truly wonderful business, stick with
it. Patience pays, and one wonderful business can
offset the many mediocre decisions that are inevitable.
This year,
I would like to describe two other investments that we expect to maintain
indefinitely. Like Coke and AMEX, these commitments are not huge relative to
our resources. They are worthwhile, however, and we were able to increase both
positions during 2023.
At yearend,
Berkshire owned 27.8% of Occidental Petroleum's common shares and also owned
warrants that, for more than five years, give us the option to materially increase our ownership at a
fixed price. Though we very much like our ownership, as well as the option,
Berkshire has no interest in purchasing or managing Occidental. We particularly
like its vast oil and gas holdings in the United States, as well as its
leadership in carbon-capture initiatives, though the economic feasibility of
this technique has yet to be proven. Both of these activities are very much in
our country's interest.
Not so long
ago, the U.S. was woefully dependent on foreign oil, and carbon capture had no
meaningful constituency. Indeed, in 1975, U.S. production was eight million
barrels of oil-equivalent per day ("BOEPD"), a level far short of the
country's needs. From the favorable energy position that facilitated the U.S.
mobilization in World War II, the country had retreated to become heavily
dependent on foreign - potentially unstable - suppliers. Further declines in
oil production were predicted along with future increases in usage.
For a long
time, the pessimism appeared to be correct, with production falling to five
million BOEPD by 2007. Meanwhile, the U.S. government created a Strategic
Petroleum Reserve ("SPR") in 1975 to alleviate - though not come
close to eliminating - this erosion of American self-sufficiency.
And then -
Hallelujah! - shale economics became feasible in 2011, and our energy
dependency ended. Now, U.S. production is more than 13 million BOEPD, and OPEC
no longer has the upper hand. Occidental itself has annual U.S. oil production
that each year comes close to matching the entire inventory of the SPR. Our
country would be very - very- nervous
today if domestic production had remained at five million BOEPD, and it found
itself hugely dependent on non-U.S. sources. At that level, the SPR would have
been emptied within months if foreign oil became unavailable.
Under Vicki
Hollub's leadership, Occidental is doing the right things for both its
country and its owners. No one knows what oil prices will
do over the next month, year, or decade. But Vicki does know how to separate
oil from rock, and that's an uncommon talent, valuable to her shareholders and
to her country.
Additionally,
Berkshire continues to hold its passive and long-term interest in five very
large Japanese companies, each of which operates in a highly-diversified manner
somewhat similar to the way Berkshire itself is run. We increased our holdings
in all five last year after Greg Abel and I made a trip to Tokyo to talk with
their managements.
Berkshire
now owns about 9% of each of the five. (A minor point: Japanese companies
calculate outstanding shares in a manner different from the practice in the
U.S.) Berkshire has also pledged to each company that it will not purchase
shares that will take our holdings beyond 9.9%. Our cost for the five totals
¥1.6 trillion, and the yearend market value of the five was ¥2.9 trillion.
However, the yen has weakened in recent years and our yearend unrealized gain
in dollars was 61% or $8 billion.
Neither
Greg nor I believe we can forecast market prices of major currencies. We also
don't believe we can hire anyone with this ability. Therefore, Berkshire has
financed most of its Japanese position with the proceeds from ¥1.3 trillion of
bonds. This debt has been very well-received in Japan, and I believe Berkshire
has more yen-denominated debt outstanding than any other American company. The
weakened yen has produced a yearend gain for Berkshire of $1.9 billion, a sum
that, pursuant to GAAP rules, has periodically been recognized in income over
the 2020-23 period.
In certain
important ways, all five companies - Itochu, Marubeni, Mitsubishi, Mitsui and
Sumitomo - follow shareholder-friendly policies that are much superior to those
customarily practiced in the U.S. Since we began our Japanese purchases, each of the five has reduced the number of its
outstanding shares at attractive prices.
Meanwhile,
the managements of all five companies have been far less
aggressive about their own compensation than is typical in the United States.
Note as well that each of the five is applying only about 1/3 of its earnings
to dividends. The large sums the five retain are used both to build their many
businesses and, to a lesser degree, to repurchase shares. Like Berkshire, the
five companies are reluctant to issue shares.
An
additional benefit for Berkshire is the possibility that our investment may
lead to opportunities for us to partner around the world with five large,
well-managed and well-respected companies. Their interests are far more broad
than ours. And, on their side, the Japanese CEOs have the comfort of knowing
that Berkshire will always possess huge liquid resources that can be instantly
available for such partnerships, whatever their size may be.
Our
Japanese purchases began on July 4, 2019. Given Berkshire's present size,
building positions through open-market purchases takes a lot of patience and an
extended period of "friendly" prices. The process is like turning a
battleship. That is an important disadvantage which we did not face in our
early days at Berkshire.
