Buffett Cuts Back On Consumer Stocks And Berkshire Cash Swells

During the second-quarter of 2012, the cash flow of Berkshire Hathaway has reached its highest level in over a year as Warren Buffett, chairman, backed off regarding the amount of shares that Berkshire Hathaway owns as far as consumer-products stocks are concerned.

Berkshire’s cash has actually advanced to $40.7 billion over the last three months, which is a 7.5% gain. This number was officially calculated on June 30, 2012. This information was first made public in a Berkshire Hathaway regulatory filing on August 3. Berkshire sold off equities during this particular quarter in companies that distribute and create consumer goods, and they also added on to the financial firms that they own, which fall under the category of “commercial, industrial and other.” The individual stocks that were purchased were not listed in this particular filing.

During a phone interview with Tom Russo, who is a partner at Gardner, Russo & Gardner, which is an investor in Berkshire Hathaway, we learned that Mr. Russo said “why keep his old names that served a purpose for a while and have gone up.” He also mentioned that a few of the consumer stocks being held by Berkshire “have various forms of blemishes.”

The 81-year-old Warren Buffett has spoken about challenges that the consumer-products firms are going to be facing. He particularly spoke about the ones in the Berkshire Hathaway stock portfolio which are Procter & Gamble, Kraft Foods Inc., and Johnson & Johnson. He has used the cash from these sales to add to his other stocks, and in particular his financial stocks, like Wells Fargo and Company. He also is expanding his Berkshire Hathaway reach through other business acquisitions.

One thing that Buffett looks for each year is a good buyout deal that he can come across. During May, he mentioned at a shareholders meeting, that he could not come to an agreement on at potential acquisition that was going to cost around $22 billion. Berkshire has not made such a large purchase like this since 2011 when they purchased Lubrizol Corp., which is an engine additives maker. They bought the company for roughly $9 billion.

Having this extra cash on hand will allow Buffett and company the ability to make a very large takeover purchase, similar to the one that they made in 2010 when they bought railroad company Burlington Northern Santa Fe for $26.5 billion. This is according to Andrew Kilpatrick, a Warren Buffett biographer.

Something Extravagant and Big

According to Kilpatrick by phone interview, “if an elephant comes along, he will fire. He’s fully equipped to do something enormous.”

During the second quarter, Berkshire Hathaway sold $3.01 billion in equities. They also purchased $1.85 billion worth of stock, and this information is gathered according to the recent filing on August 3. The consumer portfolios cost the basis slipped from $12.3 billion down to $9.84 billion.

The amount of the financial firm holdings rose up to the amount of $17.7 billion, and this is coming from $17.1 billion. They advance their position in the commercial – industrial group from $23.3 billion to $23.7 billion. According to the data, and the way we’ve extrapolated it, it doesn’t look like Buffett and Berkshire Hathaway plan on building another large stake at this time, just like they did last year in International Business Machines Corp. (IBM), says Kilpatrick.

Buffett cut back on their holdings of Kraft Foods Inc. in the year 2010, and he has continued this trend over the last four quarters consecutively, and the shares are now at a total of 78 million as of March 31, which was learned through the regulatory filings. Warren Buffett actually mentioned during the 2010 shareholders meetings of Berkshire Hathaway, that he thought Kraft’s takeover of Cadbury PLC, plus the sale of their pizza brands during the year was a “dumb” move. But Kraft stock has risen a total of 37% since Warren Buffett made those remarks in 2010, up to August 3 of 2012. The shares are currently worth $40.51.

Berkshire’s stake in Johnson & Johnson

As of March 31 in 2012, Berkshire Hathaway and Warren Buffett only owned 29 million shares of Johnson & Johnson stock. This is actually down from a total of 42.6 million shares that they held at the end of 2010. Johnson & Johnson shares have increased a total of 5.4% this year, and their share price as of August 3 is $69.12. So the New Brunswick, New Jersey healthcare maker seems to be doing okay for themselves as well.

One blemish against Johnson & Johnson is that they have to pay over $1.1 billion in fines during April 2012. A jury in Arkansas said that the firm misled their patients and doctors in regards to the risks of Risperdal, which is an antipsychotic medication that the company produces. They have even struggled with recalls of over-the-counter medicines and artificial hip implants.

In an interview that Warren Buffett gave on CNBC on February 27, 2012, he stated “it’s still got a lot of wonderful products and it’s got a wonderful balance sheet and all of that, but there have been too many mistakes.”

Procter & Gamble

Warren Buffett and Berkshire Hathaway also cut back on their holdings of Procter & Gamble by a total of 4.6% during the first quarter of 2012. This brought the total of their shares down to 73.3 million. One area where P&G struggled is raising their prices for specific products where there are cheaper alternatives. Gillette razors and Tide laundry detergent immediately come to mind. Warren Buffett also spoke about this on CNBC in May. P&G stock has gone down a total of 1.8% during the year 2012, and the share prices are currently worth $65.50 as of August 3.

Robert McDonald, CEO of Procter & Gamble, is working on a plan to show that the way he prices his products, plus the cost-cutting measures that are currently in place, will be enough to improve the results of the company. Bill Ackman’s Pershing Square Capital Management LP actually took out a $1.8 billion stake in Procter & Gamble in July. People who are familiar with the company, and those in the know, are under the impression that Mr. Ackman plans on pushing for changes in leadership in Proctor & Gamble.

Berkshire Hathaway has until the end of next week to file its US equity holdings list as of June 30 with the SEC. None of the representatives from Procter & Gamble, Kraft Foods Inc. or Johnson & Johnson felt the need to comment. Warren Buffett himself never returned a message that was left for him with his assistant.

Combs, Weschler

It is highly unlikely that Warren Buffett and Berkshire Hathaway lowered their stake in Coca-Cola Company, which is an Atlanta-based business. They are actually Berkshire Hathaway’s largest holding at this time. It is also known that Warren Buffett added to his stake of Walmart during June of this year. Shares of Walmart unfortunately took a nosedive in April when a New York Times article mentioned that the company was bribing Mexican officials to speed their expansion. The shares dropped down to $57.36 at that time.

Warren Buffett stated, in regards to Walmart, that the shares were “very attractive compared to other big companies.” He mentioned this when the shares were roughly $58-$59. This was mentioned on Bloomberg television in an interview that he did with Betty Liu. As of August 3, Walmart shares are currently worth $74.55.

It is also speculated that some of the extra money that Berkshire Hathaway has on hand is going to be distributed to former hedge fund managers Todd Combs and Ted Weschler. They were hired over the last two years to help Mr. Buffett and Berkshire oversee their investments, according to David Kass who is a professor at the University of Maryland’s Robert H. Smith school of business. He also mentioned in that same interview on July 13 that both former hedge fund managers will most likely oversee about $4 billion each worth of investments, as opposed to the current $2.7 billion worth of investments that they are currently managing.

Derivative Bets

It is also expected that Warren Buffett will use the excess funds to get out of some of his derivative bets, which was also stated by David Kass during an interview that he gave on the phone. Berkshire came to a deal after June 30, and they were going to cancel half of their $16 billion in notational protection which it sold against state and municipal bond defaults, and this is according to their last filing. It is a possibility that Buffett’s firm is going to have to pay a counterparty in order to relieve themselves of these obligations, said Kass.

The bets in derivatives have made the earnings of Berkshire Hathaway a lot more volatile. Mainly because they are marked to market. Their net income actually dropped 9% during the second quarter to a total of $3.11 billion due to a much broader loss from derivatives that are separate to the equity markets. Operations earnings, which are not so clouded by the investment results, are higher due to gains that their insurance and railroad divisions have made.

Warren Buffett mentions in a letter to the shareholders in February that the current new rules based around collateral have unfortunately made derivatives not so attractive any longer. He also mentioned that these bets in derivatives are most likely going to shrink when the company’s new leaders take over, which he said during the annual meeting in the month of May.

One Comment

  1. A 7% gain over a year is already improvement enough to be proud of. At least they get to have such progresses over a short time. It makes us want to expect how much more they'd advance over some more years.

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