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Rupert Hargreaves
Rupert Hargreaves
Articles (651)  | Author's Website |

Digging Deeper Into Buffett's Travelers Purchase

Looking at Berkshire's buys in the 3rd quarter

December 06, 2018 | About:

In the third quarter of 2018, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) added several new positions to its equity portfolio.

All of the companies the company added were in the financial services sector, which, as I have speculated previously, suggests Warren Buffett (Trades, Portfolio) is handing more power over to his investing lieutenants, primarily Todd Combs, who, before joining Berkshire Hathaway in 2010, ran a hedge fund that specialized in financial stocks.

One addition to the portfolio was Travelers Companies Inc. (NYSE:TRV). In the grand scheme of things, this is an almost insignificant position in the portfolio as it was only worth $460 million at the end of the quarter, around 0.2% of Berkshire Hathaway's overall, $221 billion equity portfolio.

According to Berkshire Hathaway's third-quarter 13F filing, the conglomerate acquired this position for an average price of $129.77 per share. Today, the stock is changing hands at $126.70 (at the time of writing). If Berkshire's team loved the stock when it was trading at $129, they certainly like it today. Should you make the most of this opportunity?

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Time to buy

When I last covered Berkshire Hathaway's equity acquisitions in the third quarter, I briefly touched on the Travelers Companies buy and why the stock looked attractive. I noted that over the last 12 months, the series of natural disasters had sent investors in this insurance business running for the hills. Over the past five years, however, it has achieved a steady rate of earnings and book value growth while returning plenty of cash to investors.

These are backward-looking figures, though, and don't really give any credit to the company's future potential. Looking forward, Travelers appears to be well positioned to grow. Back in October, it announced a major new tie-up with Amazon. Under the new partnership, the insurer will offer smart home kits produced by the online retail behemoth to help clients protect themselves from some of the most common causes of insurance loss, including fire, break-ins and flooding. This partnership has ignited speculation that Amazon and Travellers will eventually combine if the e-commerce giant decides to get into the insurance business.

Travelers has other advantages that will help it grow going forward as well. For example, the company is focused on underwriting insurance for commercial clients in the middle of the market, contracts which are generally more specialized and resistant to disruption. The company's size and established reputation with customers means it sits in a unique position and has a moat around its core business.

It also appears to be exceptionally good at risk management and pricing risk effectively. For each of the past five years, the group's combined ratio has stayed below 100% (in fact, it has been sub-90 in most years). Recent disasters will hit profits, but past performance suggests it won't be long before the company returns to its old ways.

Capital allocation policies

In addition to prudent underwriting, opportunities for growth and a unique market, Travelers has also exhibited brilliant capital allocation policies over the past decade.

Rather than chasing growth, the company has returned excess capital to investors. When the rest of the market was panicking during the financial crisis, management kept a cool head and started to make the most of the languishing stock price. Aggressive share repurchases helped reduce the number of outstanding shares from 585 million at the end of 2008 to roughly 393 million shares by the end of 2011.

In the years since, the share count has continued to decline. At the end of the third quarter, the company had just 272 million shares outstanding. This means that over the past decade, the company has bought back more than 53% of its outstanding shares -- that's without taking into account any cash returned to investors via dividends.

Looking at the above, I think the only question investors should be asking when pondering why Buffett decided to add Travelers to his portfolio is, why didn't he buy it sooner?

Disclosure: The author owns shares of Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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