Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) latest 13F showed us that Warren Buffett (Trades, Portfolio) had taken some significant new equity positions in the third and fourth quarters of last year.
According to the fourth-quarter report, at the end of 2020, Berkshire owned 147 million shares in Verizon Communications (VZ, Financial). This position was worth just over $8.6 billion to the conglomerate at the end of the year.
As well as this position, the Oracle of Omaha also acquired a significant stake in oil and gas producer Chevron (CVX, Financial). This position was worth just over $4 billion at the end of 2020.
I find both of these positions as a surprise. Verizon is now a top ten position for Berkshire, which I personally would never have expected. The holding's size indicates Buffett himself pulled the trigger, but he has advised investors to stay away from these types of businesses in the past.
The agony and the ecstasy
In the spring of 1991, Warren Buffett (Trades, Portfolio) gave a series of lectures to the Notre Dame Faculty, MBA Students and Undergraduate Students.
In the lectures, he outlined what he called the agony vs. ecstasy of businesses or, to put it another way, the best and worst qualities of businesses. To demonstrate, he gave an example of two businesses, Company A and Company E:
"Company A and Company E, has made one of its owners one of the five wealthiest people in the world, while the other company made its owners appreciably poorer, probably more so than any other company to that point in time."
He went on to add some more color, explaining that Company A had thousands of MBAs working for it whereas Company E had none. Company A also had thousands of patents, but Company E "never invented anything." What's more, Company A's product "improved dramatically in this period," but Company E's product remained unchanged.
Company A (Agony) was American Telephone and Telegraph, while Company E (Ecstasy) was Thompson Newspapers.
Company A's problem was that it required an enormous amount of capital to grow. Buffett pointed out that over nine years, the firm's assets went from $47 billion to $99 billion and earnings increased from "$2.2 billion to $5.6 billion."
"More and more money had to be tossed in," Buffett observed. That was the problem with high capital intensity businesses. Meanwhile, the newspaper business didn't have to put in any extra capital. As Buffett went on to summarize:
"One is a marvelous, absolutely sensational business, the other one is a terrible business. If you have a choice between going to work for a wonderful business that is not capital intensive, and one that is capital intensive, I suggest that you look at the one that is not capital intensive. I took 25 years to figure that out, incidentally."
Verizon has the same problems. The company's management has guided for capital expenditures between $17.5 billion to $18.5 billion for 2021. Capital spending is likely to remain at this level for the foreseeable future, limiting its ability to grow free cash flow. There's also the competitive nature of the telecommunications market to consider. Verizon can't just increase prices to get back its investment.
That being said, there has been a shift in Buffett's investment strategy over the past few decades. As Berkshire has gathered more and more money to invest, Buffett has struggled to find attractive places to put it with desirable return rates. So, he has branched out more into infrastructure, railroads and energy generation.
It seems Verizon may be an extension of this strategy. With a dividend yield of around 4.6% of the time of writing, the stock could be an attractive place to park cash compared to other assets such as Treasuries.
Disclosure: The author owns no share mentioned.
Read more here:
- Michael Burry Goes on a Buying Spree in Q4
- Bruce Berkowitz Makes a Comeback With St. Joe
- Thoughts on Warren Buffett's View of Diversification
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