Warren Buffet is an investing legend. He has made investors in his holding company, Berkshire hathaway, very wealthy over his career. Over the past 35 years the Warren Buffet’s juggernaut that is Berkshire Hathaway has grown its book value at a compounded rate of return of 19.0%. To put that amazing run into perspective, the S&P 500 has generated total annual returns of only 11.8%. For a manager as large, diverse and as closely followed as Buffett, those returns, spread out over 35 years, are nothing short of amazing.
Buffett himself has evolved as an investor over the years. He has gone from being a deep value “cigar butt” investor into one that buys wonderful businesses at reasonable prices. During his tenure as CEO of Berkshire Hathaway, he has transformed it twice: First from a textile mill into a diversified insurance company and then into a vast and extensive conglomerate. But while no one can question the investment acumen of the greatest investor that ever lived nor question his ability to transform his company, the question of wether or not Berkshire Hathaway makes the grade as a retirement stock is a different matter entirely.
What makes a good retirement stock?
Let’s go back to basics and assess what makes a a good stock to hold in retirement. One of the fundamental characteristics for retirement stock is that the stock needs to be of a stable company in an industry or industries that are not too susceptible to technological upheaval. This is extremely important as we are looking for something to hang on to throughout the golden years of retirement.
Buffet himself has stated that he buys companies that he would be comfortable holding if the stock market were to close for five years. In the age of rapid technological change, smartphones these companies are harder to find. But they are definitely out there, and I would include Berkshire Hathaway among them.
Berkshire Hathaway has individual holdings that under attack from evolving technology. Perhaps the most visible is IBM. As IBM’s businesses has come under attack from cloud-based competitors, its sales have taken a hit, as has its share price.
But here is the beauty of the diverse nature of Berkshire Hathaway. While IBM is one of its largest publicly traded holdings, it makes up only 3.5% of Berkshire’s market cap. When looking at berkshire Hathaway, it is important to remember that the vast majority of its earnings come from its non-publically traded holdings and the majority of these are technologically resistant or ‘technology proof’.
Another good aspect of Berkshire Hathaway is that Warren Buffett is all too aware of his own mortality. Thus he has assembled a company with diverse holdings that will likely not only survive but prosper decades after he leaves the company.
But despite all the positive mentioned above, Berkshire Hathaway cannot in my opinion be considered a stock to hold in your retirement because it daily one fundamental test : it does not pay a dividend.
And I don’t blame Berkshire for keeping its cash. With a man as talented as Buffet at the helm, a dollar paid out as a dividend is a waste of capital. Buffett can reinvest that dollar better than you or I can. But dividends are critical to a retirement portfolio. Without them, you have to sell shares to realise any income.
Selling the shares as a result of capital appreciation is not a problem in a bull market. The problem is in a bear or down market, it can massively deplete your capital. Just look at the market crash of 2008, Berkshire lost 40% of its value. And looking further back at the period between June 1998 to August 2003, shares in Berkshire Hathaway traded sideways, not earning its investors a single dollar. If you are in retirement, you can’t afford to have those sideways years. If the company had paid a dividend, you can live off the dividends during the bad times as opposed to selling your shares on the cheap in order to meet your living expenses.
So when all things are taken into consideration, Berkshire Hathaway is not a very suitable retirement stock. Although Berkshire is a great company that will only grown in the decades to come, the one thing that let’s its down for people in retirement is its non divided paying nature. However, if you still want buy Berkshire Hathaway stock, read my article on how to get it a discount.
*As always, the above is only my opinion. You need to do your own research before you buy or sell any stocks.