Berkshire Hathaway is a big fan of this energy monster because it isn’t going anywhere and it’s cheap. Plus it’s big enough to fit the Berkshire investing profile.
Berkshire doesn’t necessarily believe in timing the market. Warren Buffett avoids daily price movements and doesn’t really pay much attention to them. But it is important to pay close attention to the way the market changes. It are important to the way that you invest.
Institutional money managers have to report their stock positions within 45 days of each calendar quarter. And Berkshire Hathaway is required to follow the exact same rules.
The biggest change to Buffett’s portfolio is the 40.1 million shares that he purchased for $3.4 billion in Exxon Mobil stock. In fact, Buffett picked up nearly 3/4ths of this position during the second quarter. He was also provided confidential treatment by the SEC with his previous filing so that he was able to continue to build the position.
Exxon Mobil is the perfect choice for the Berkshire Hathaway portfolio in many ways. Here are three specific reasons why Buffett chose it:
It’s Very cheap at the Moment
At the time of this writing, the estimated earnings per share is only 11.8 times for the next 12 months. And when you look at Exxon Mobil compared to the S&P 500, you see that it trades at a 23% discount to the forward earnings multiple. But not only that, it’s paying a 2.7% dividend yield against the indexes mere 2%.
Plus, the valuation was actually lower when Buffett first started building the position. The average forward earnings multiple was 11.3 in the second quarter and just 10.8 during the third quarter. These multiples certainly generate interest when you realize they are associated with one of the most profitable and best managed companies all across the world.
Based on Market Value, Exxon Mobil Is the Second-Largest Company on Earth
Per today’s filing, Berkshire Hathaway’s reported stock holdings value is $92 billion. This company generates a tremendous amount of cash on a regular basis, and Buffett does a great job allocating the profits. The first nine months of 2013 showed Berkshire Hathaway with an operating cash flow of $20.7 billion.
Because of this, when it comes to the publicly traded stocks, Buffett doesn’t have time to waste on the small fish. He has the focus his time, effort and energy on the larger companies in the stock market ocean. Exxon Mobil has a market value of $407 billion, which makes it the second largest company in value across the world. It’s certainly the kind of catch that Warren Buffett regularly looks for. The size and liquidity of Exxon Mobil gave Buffett the opportunity to make it his largest new position since putting $10 billion into IBM, another mega-issue back in 2011.
There’s No Question about Exxon Mobil’s Longevity
Buffett loves to invest in businesses that are going to be around for a long time. And it’s quite obvious that Exxon Mobil has staying power. As a long-term investor, the permanence of this company is definitely an attractive quality.
Warren Buffett is confident that this company shares that particular characteristic. We know this beyond the shadow of a doubt because of his letter to shareholders in 2011. He argued against buying gold stock in his hypothetical portfolio of productive assets, and the current value was made up of “all US cropland…, +16 Exxon Mobil’s.” To conclude his argument, Buffett wrote:
“A century from now… Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions…”
There’s no doubt about it… a century is a long time. But there is no reason to doubt that Exxon Mobil will not be churning out tons of cash and giving it back to its shareholders over the next few decades. If you are a buy-and-hold investor, this is definitely a good place to start. Especially because you can buy it right now at the right price.