Warren Buffett (Trades, Portfolio) was very active last quarter. According to Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) latest 13F filing, the investment conglomerate spent approximately $12 billion last quarter buying shares for its investment portfolio.
As I have already noted, the shares that the conglomerate decided to increase and initiate positions in can tell us a lot about where the company is heading. Most of the additions and acquisitions were in the financial sector, a sign that, in my opinion, Buffett is handing more power over to his investing lieutenants, mostly Todd Combs, who, before joining Berkshire Hathaway in 2010, ran a hedge fund that specialized in financial stocks.
Small changes
Away from the significant changes to the portfolio, which included several billion dollars of stocking Bank of America (BAC, Financial) and JPMorgan (JPM, Financial), there were several smaller additions to the portfolio in the financial sector.
The first of these was PNC Financial Services (PNC, Financial). In the third quarter, whoever was behind the trading spent $830 million building a new position for Berkshire in this company. This is a substantial position for most hedge funds, but for Berkshire Hathaway, it only accounts for 0.4% of the overall equity portfolio.
Another edition is Travelers Companies Inc. (TRV, Financial). In the quarter, Berkshire Hathaway initiated a position worth $460 million. Significantly smaller than the PNC holding, and only worth around 0.2% of the $221 billion equity portfolio.
In my view, Travelers is the most interesting of these two companies. Over the past 12 months, a series of natural disasters and storms in the U.S. have pushed shares of this business down from an all-time high, which was printed at the end of January, to a 52-week low.
At the time of writing, the stock is not particularly cheap, but this seems to be one of those companies that is worth paying a premium for. Over the past five years, earnings per share have increased at an average annual rate of 4.5%. But this is really not the best way to value insurance companies considering the volatile nature of income -- a year can be made or lost with just one major disaster.
A more accurate gauge of an insurance company's quality is book value growth. When it comes to book value, Travelers has achieved an annualized book value per share growth of 5.4%. This is been achieved by sharing repurchases; in fact, the share count has dropped by 6.5% per annum for the past five years and the reinvestment of income into the company's investment portfolio. The dividend per share has grown from 9% per annum over the past five years and the current dividend yield is 2.5%.
Put simply, this is a business that has a proven track record of creating value for shareholders and returning capital effectively. It is not surprising that Berkshire Hathaway has decided to initiate a position in the stock after its recent decline.
Book value growth
PNC financial has similar qualities. Unlike Travelers, it is a diversified financial services business; it operates in retail banking, corporate and institutional banking and asset management. It has achieved steady earnings growth over the past five years, with earnings per share more than doubling and the dividend has grown at an average annual rate of 11% since 2012. Book value per share has grown at an average annual rate of 6.3% over the past five years, and right now the stock is trading at a price-book value of 1.3 and forward earnings multiple of 12.4 with a 3% dividend yield.
This is only a brief look at these companies, but I think it gives an excellent overview of why Berkshire Hathaway has decided to invest. Both businesses have a proven track record of growth and have been returning cash to investors by buying back shares as well as distributing a dividend. The recent share price weakness for both companies presented an opportunity to acquire these stocks at attractive valuations, and Berkshire Hathaway didn't hesitate.
Disclosure: The author owns shares of Berkshire Hathaway.
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