Warren Buffett’s largest stock holdings at Berkshire Hathaway might change more often than you think they do. If you pull up an annual report of Berkshire from 2005, you will see the largest stock investments listed as follows: American Express, Ameriprise Financial, Anheuser-Busch, Coca-Cola, M&T Bank Corporation, Moody’s, Petrochina “H Shares”, Procter & Gamble, Wal-Mart, The Washington Post Company, Wells Fargo & Company, and White Mountain Insurance.
By the time 2013 came around, the reported list of stock holdings contained some familiar faces, but some changes as well: American Express, Coca-Cola, DirecTV, Exxon-Mobil, Goldman Sachs, IBM, Moody’s, Munich Re, Phillips 66, Procter & Gamble, Sanofi, Tesco, U.S. Bancorp, Wal-Mart, and Wells Fargo & Company. I put in bold the names that remained consistent between the 2005 and 2013 list.
What I find worth noting today is the extent to which Buffett has consistently, and quietly, been discarding of the company’s stake in the legendary household product company Procter & Gamble. In fact, Warren Buffett never really bought shares of Procter & Gamble in the first place—he invested in Gillette in 1989, and endorsed its merger into the Procter & Gamble conglomerate in 2005, at which point his Gillette ownership position transitioned into 100,000,000 shares of Procter & Gamble. From 2005 through 2014, Buffett methodically reduced Berkshire’s P&G stake each year, taking it down to 52.4 million shares as of this calendar year.
Then, he announced this past week that he is trading the remaining 52.4 million shares of Procter & Gamble from Berkshire’s portfolio of investments in exchange for ownership over Duracell batteries plus the $1.8 billion in cash that had been on Duracell’s balance sheet. This is nothing short of brilliant tax magic on Buffett’s part—by making a P&G stock for Duracell + cash swap, he is able to avoid paying north of $900 million in taxes to the U.S. government on the transaction (you have to remember that these shares of P&G on Berkshire’s balance sheet had been accumulating for a long time).
This partially explains why Berkshire is such a superior compounder over time—not only are the individual investments and operating companies wisely chosen, but the transactions and nature of the changes to Berkshire’s holdings over time have always been done in a way that keeps the tax payouts to an absolute minimum (this is also an important reason why I favor buy-and-hold forever investing on this site because it lets you go through life without 15% or more capital gains haircuts on your invested capital).
Of course, some of you who own Procter & Gamble may be wondering whether you should contemplate selling the stock. After all, Buffett doesn’t want the stock. The profits have been increasing in the mid-single digits lately. And it is likely that the stock is 15-20% overvalued, and the current P/E valuation of nearly 25x profits will work its way towards 20x profits over the long term. While the latter might be a good reason to abstain from adding shares of Procter & Gamble at this point in time, it does not seem wise to sell.
A few things to keep in mind:
Just because Warren Buffett sells a blue-chip business does not mean that the company has ceased being excellent. Buffett sold out of Disney in the 1960s, and the stock compounded at 13% annually in the five decades since then. For a more recent example, he sold McDonald’s over a decade ago, and the stock went on to compound at almost 11% annually after the point at which he made his sale. He often deals in excellent companies, and they don’t cease to be excellent companies when he relinquishes his ownership position. Heck, he sold Johnson & Johnson a few years ago in the $60s, and the business results have been excellent since then, taking the stock into the $100s.
And secondly, you need to beware of recency bias when you extrapolate recent bad news and project it indefinitely into the future. For much of the 2010s, investors were ragging on Pepsi became it was having trouble growing profits. Now, earnings per share growth is back on track as last year’s profits of $4.37 are expected to give way to $5 in profits next year. Shareholders got a nice 15% dividend hike as a catch-up from the previous year’s hike of only 5%. Procter & Gamble is in a similar position, where the 3.0% earnings per share growth of the past five years can quickly give way to 7-8% earnings per share growth in a hurry as sales of its main divisions are growing at 5% which usually translates into 8-9% earnings per share growth while P&G is in the process if selling off its slower growing divisions. The company also has $10 billion in cash on its balance sheet (about 2.5x the usual amount) and it may make an acquisition in the not-too-distant future.
P&G has been raising its dividend for 50+ years. It hasn’t missed a dividend payout since going public in the 1890s. It increased its dividend during parts of WWII, for heaven’s sake. In bad years, the dividend payout still increases at a rate twice inflation, and in good years, the payout increases around triple the inflation rate. These are the kind of assets you want to hold for a lifetime. Even the company works through the inevitable periods of slow growth, you get paid a growing amount each year while you wait. It’s a nice stock to have in the background, incessantly compounding, while you locate your fresh cash towards more attractively valued and faster growing opportunities.