No company provides a better case study about the benefits of long-term investing than Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial). However, inside the conglomerate, another business has an even longer-term mentality and focus than its parent.
I'm talking about Berkshire Hathaway Energy (BHE). Managed by Greg Abel, this enterprise has grown substantially over the past decade. Reinvested earnings are responsible for virtually all of its growth. Unlike other utility companies, which tend to return as much cash as possible to their investors, BHE reinvests all of its earnings.
The capital allocator
This wouldn't be possible without a parent company like Berkshire. Warren Buffett (Trades, Portfolio) is a highly astute capital allocator, and he's well aware letting a good business compound is a much better use of capital than trying to find other opportunities to deploy the same capital.
Buffett is also a long-term investor. BHE hasn't provided any returns for Berkshire, and it is unlikely to do so for the foreseeable future as it pursues growth initiatives.
Many business managers would find this unpalatable. Buffett does not. He's more than happy to let BHE compound as he's well aware that when it finally does reach its maximum size, the returns will be significantly higher than if he had been taking money out of the business all along.
Another example of this in the corporate world is Amazon (AMZN, Financial). For the past 30 years, under the stewardship of its founder Jeff Bezos, this company has had a singlular focus on growth. Today it is reaping the rewards. Amazon is dominating the markets where it's the leader. It has only been able to achieve this kind of growth by delaying gratification.
Amazon and BHE have only achieved the growth rates they have by taking a long-term mentality. They invest today for projects that will reach maturity in 10 or 20 years.
Projects in the pipeline
Abel spoke about this topic when he joined Buffett at Berkshire's 2020 annual meeting. BHE's manager noted that the business had $40 billion of capital projects underway at the time, with another $30 billion in the pipeline. He went on to add:
"It's a lot of work. The transmission projects, for example, we're finishing in 2020 were initiated in 2008 when we bought Pacific Corp. I remember working on that transmission plant, putting it together thinking six to eight years from now we'll have them in operation. Twelve years later and over that period of time we earn on that capital. We have invested, and then when it comes in to service, we earn on the whole amount. So we're very pleased with the opportunity, but we plant a lot of seeds. Put it that way."
As Buffett then explained, these assets were not "super high return things." But Berkshire's unusual mentality meant it was "almost uniquely situated" to make the investments required.
Other companies just don't have the patience and the available capital to pursue the sorts of projects BHE has developed.
Buffett added that the overriding goal of BHE capital deployment is "not a way to get real rich, but it's a way to stay real rich." The investment won't earn super returns, but it will yield a "decent return" over the long run on Berkshire's capital investment.
Many investors may find it difficult to adopt this sort of long-term mentality. Many companies may struggle to do so as well. Most don't. However, looking at a small selection of those that do, it is clear that this may be the right approach. That's why BHE deserves attention. It is a case study on the benefits of long-term investing.
Disclosure: The author owns no share mentioned.
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