With everything going on in 2020, it can be easy to ignore one of the biggest storylines that has been somewhat quietly developing–namely, the Public Investment of Saudi Arabia has been aggressively buying up large ownership stakes in many American and British corporations.
Specifically, in 2020, Saudi Arabia’s investment arm has made the following acquisitions: $828 million in BP stock, $714 million in Boeing stock, $523 million in Facebook stock, $522 million in Citigroup, $514 million in Marriott stock, $496 million in Walt Disney, $491 million in Cisco, $484 million in Royal Dutch Shell stock, $481 million in Suncor Energy stock, $416 million in Live Entertainment, $408 in Canadian Natural Resources stock, and a hodgepodge collection of sub-$100 million investments in Berkshire Hathaway, Qualcomm, Pfizer, IBM, Starbucks, ADP, and Union Pacific. In addition, the Saudi Investment Fund purchased Newcastle United (you know you’re in strong financial shape when a professional soccer team is only your 12th largest expenditure during the first half of the year).
What I find notable about Saudi Arabia’s investments since Crown Prince Mohammed bin Salman took over stewardship five years ago is that the Saudis are engaging in the two actions that are the most conducive to gaining power, control, and wealth over the long term: (1) they are purchasing stock in market leaders during moments of distress, and (2) they hold for the long term, with very few stock sales.
Almost no one is talking about it, but Saudi Arabia is well aware that it can wield the “PetroDollar” in a way to gain global influence. When the markets are in disarray, it can flood the world with oil production and still be profitable at any price over $18 per barrel and the production volumes are so significant that it can use the cash to gobble up assets on the cheap. Likewise, during an expansionary era, it can cut production when it is needed most and earn obscene profits that can be used to purchase assets that are trading cheaper on a relative basis.
At some point, I expect the Saudis to become the bankers of last resort. These days, you often see political pressure applied to major American banks and other Western financial institutions to refrain from lending money to defense/arms manufacturers, tobacco companies, or some other entities that are deemed to be a sin stock or socially irresponsible. If the boycott move is successful, these undesirable firms will be driven into the arms of Saudia Arabia for their corporate funding needs. If Americans don’t like the elective decisions of the other political party domestically, you can only imagine what will happen when governance is driven by an totalitarian absolutist monarchy.
What I personally find notable is that Saudi Arabia is not making any of the typical mistakes here. It is not investing billions of dollars into Silicon Valley firms trading at 1,000x earnings or some other type of silly valuation where the capital is likely to be destroyed through price rationalization. Nor is Saudi Arabia rapidly churning through its investments, moving from one hot sector to the next in the behavior that can explain why the average investor has only earned 1.9% annual returns since 2000 despite market returns of nearly 8% annualized over that same time period. It’s just…acting very intelligence and buying sound assets that are likely to appreciate at high single digit to low double-digit amounts over a multi-decade holding period.
In terms of style, Saudi Arabia just takes the cash dividends thrown off from its investments, lets them pile up, and then mixes the dividend income with the billions in oil profits to make new investments. This is the formula for creating a cash-generating machine. When you read Jeremy Siegel or any text dedicated to long-term investing, this is what the advice is–take the surplus from the core business, acquire other market-leading businesses at affordable prices and hold for the long term, and then combine the cash thrown off from the core business and the other investments made over time to wash, rinse, and repeat.
It is how small business owners across America with $10,000 in surplus each month end up with $42 million fortunes at the end of their lives because they just acquire ownership interests in strong businesses that create an ever-expanding compounding machine. But Saudi Arabia is not starting out with $10,000 per month. It’s starting out with a few billion per month.
The other part that I find significant is that many corporations utilize share repurchases as a tool for growing earnings per share by retiring shares. I think I previously pointed out how, with its initial 5% stake in Apple, Berkshire Hathaway is poised to become the majority owner of Apple stock at some point in the next 40 years if Berkshire never sells a share, the repurchases occur at the same rate and valuation levels, and there is never any major dilutive events. I am not offering any opinion on the likelihood of that occurring, but I am pointing out how I believe “repurchase gravity” benefits large long-term shareholders over time in the form of increasing corporate control in the absence of an intervening event.
From a destabilizing standpoint, Saudi Arabia could likely drive up the price of oil quite quickly given the fact that 2020 has led to enormous corporate bankruptcies in the E&P and refining oil sector of the economy and increased global production in response to moderate growth in demand will require Saudi Arabia’s voluntary participation (i.e. the bankruptcies and destruction in the oil sector in 2020 means that Saudi Arabia is the main player left that can rapidly increase production if the demand should present itself). If Saudi Arabia does not oblige under such circumstances, you could encounter a situation where oil rises from $70 to $130 very fast and with little warning. When oil gets cheap, many people wonder if it will last forever or presents a “new normal.” I don’t. I look around at how the global production chains get sidelined and can create a possibility of radically higher oil prices over a period that could last three years or so if Saudi Arabia specifically seeks it.
I especially find it notable that Saudi Arabia was pumping billions of dollars into stock in the past few months while Berkshire Hathaway has been largely silent (though Warren Buffett’s purchase of Dominion’s natural gas pipeline will pay for itself in short order, as the $10 billion purchase price is a misnomer because Berkshire is only paying a little over $3 billion for the assets and it is assuming $7 billion in debt that the natural gas pipeline has twenty years to pay off so the net effect is that, for $3 billion, he is getting 70% of Dominion’s profits through 2040 while the other 30% go to creditors).
What is especially notable is that Saudi Arabia is not “out of ammo.” A deep recession could hit at some point in the next few years, and it could outlay even more capital than it has done so far in 2020. The company of passive investments, large future investments, and share repurchases in these globally dominant firms means that corporate control is moving in Saudi Arabia’s direction. Saudi Arabia’s PetroDollar could be the 21st century’s Marshall Plan in terms of influence. The building blocks are not only there, but being placed accordingly.