Buffett Confronts New SPAC Rivals, Old Cash Woes Before Meeting

LAGOS (Capital Markets in Africa) — A year after Warren Buffett revealed he was unloading airline stocks as the pandemic took hold, Berkshire Hathaway Inc.shareholders are eager for his sense of what’s next for the conglomerate with more Americans emerging from lockdown.

On Saturday, Berkshire’s chief executive officer will address shareholders via video-conference to conform with health guidelines, scrapping for a second year an arena event in Omaha, Nebraska, that typically attracted thousands of adoring fans. He’ll likely recount how the global crisis took a toll on some of the company’s wide-ranging businesses while bolstering some others.

Investors will seek insights into the pulse of the U.S. economy from Buffett, whose company owns the BNSF railroad and has a stake in truck stop chain Pilot Travel Centers.

“The first thing we’re going to be looking for is a demeanor on his part that should reflect a greater degree of confidence and visibility on the impact of the pandemic,” Cathy Seifert, an analyst at CFRA Research, said in an interview. At last year’s meeting, when uncertainty continued to plague businesses and markets, Seifert “had the sense that he was truly frightened,” she said.

A representative for Berkshire declined to comment ahead of the meeting.

Last year’s event was a modest affair with Buffett striking a subdued tone amid uncertainty from the pandemic, as he sat spaced apart on stage from his deputy Greg Abel. Buffett, 90, moved the meeting to Los Angeles this year, where his longtime business partner and Berkshire vice chairman Charlie Munger, who is 97, lives.

While the billionaire investor could offer a unique perspective on how the economy is faring, investors have been largely in the dark recently about how he views the fallout from the Covid-19 crisis. His 15-page annual letter in February mentioned the pandemic only once: One of his furniture companies had to close for a time because of the virus, the billionaire noted on page nine.

But some of his other businesses also felt the strain. The pandemic weighed on sales for retailers such as See’s Candies and party-goods supplier Oriental Trading Co. Precision Castparts, a maker of aerospace and energy industry equipment, was largely behind the $11 billion writedown Berkshire took last year when the virus slashed demand for flights. But Geico reported lower losses as shutdowns decreased the level of driving across the U.S. Kitchen-supply seller Pampered Chef posted higher earnings in 2020.

“There’s a lot of opportunity for him to probably share some really interesting insights into the pandemic,” Jim Shanahan, an analyst at Edward D. Jones & Co., said in an interview. “He could probably talk about parts of the country that have had more robust recoveries to this point and parts of the country that are lagging in a way that some executives can’t do.”

Whatever the commentary he delivers, Berkshire has been shaking things up among its investments since last year’s meeting. The company, which dumped airline stocks including shares in Delta Air Lines Inc. and Southwest Airlines Co. early in 2020 as the pandemic crushed travel, has been trimming its bank holdings over the past year in a major shift for a portfolio that had roughly 41% of its fair value concentrated in banks, insurers and financial firms at the end of 2019.

When he addresses shareholders, another potential theme could be how businesses adjust as the recovery unfolds: With vaccines rolling out, large corporations are re-examining everything from customer demand to their return-to-office plans. JPMorgan Chase & Co. said this week that U.S. staff should expect to come back on a rotating basis in July. Other companies, including Mitsubishi UFJ Financial Group Inc., are considering ways to cut real estate footprints in regions such as the Americas.

Other topics the meeting might address:
Spending That Cash
Berkshire ended 2020 with more than $138 billion of cash, even after spending a record $24.7 billion on buybacks last year. The constantly swelling pile has been weighing on the conglomerate’s stock, with Berkshire Class A shares falling short of the S&P 500’s 102% price gain over the past five years. “We expect capital management will again be a key topic at this year’s annual meeting,” UBS Group AG analysts led by Brian Meredith said in an April 26 note to clients. They estimated that Berkshire repurchased about $5 billion of its shares in the first quarter. Buffett’s desire to snap up even more of Berkshire’s own stock has offered the billionaire investor another way to deploy capital, especially as the popularity of special purpose acquisition companies makes the environment for takeovers even more competitive. Earnings on Saturday should give investors a sense of how much money he spent on repurchases in the first three months of the year.
Berkshire was able to strike a few deals last year. The company invested in five Japanese trading houses and purchased some natural gas assets from Dominion Energy Inc. But the conglomerate was foiled at the start of the pandemic when the federal government swooped in to help companies that might have otherwise turned to Berkshire as a safe haven. “There will be some questions about that, too, because if anything, there’s as much or more capital on the sidelines in competition with him than there was before,” Shanahan said, referring to Berkshire’s dealmaking. “The SPACs were kind of a new wrinkle.”

Biden Era
Buffett has been careful to tread lightly around political topics in recent years. While he has campaigned for candidates in the past, he kept mostly mum about last year’s election.
With President Joe Biden’s newly released tax plan and infrastructure proposal now making the rounds, Buffett could weigh in on their potential impact both on the economy and on Berkshire in particular.

Climate Change, Diversity
Berkshire is facing two shareholder proposals at the meeting this year, one about climate change and the other about diversity and inclusion. Both seek to push the company to publish more information on its efforts on those fronts. The board is advising investors to vote against the proposals, while acknowledging that managing climate risks and addressing diversity are important issues. Buffett has long said that Berkshire’s decentralized approach — where each subsidiary handles their own business with very few functions for the conglomerate — makes producing multiple comprehensive reports or finding ways to report data in a uniform way for such varied businesses burdensome. Each unit should be addressing these risks individually, according to Buffett. The company is also contending with moves by two proxy advisory firms. Glass Lewis recommended withholding votes or voting against the election of audit committee chair Thomas Murphy, citing lack of climate change risk disclosure. Institutional Shareholder Services advised that votes be withheld for four board members because of ineffective oversight on compensation. ”I don’t recall there ever being an issue with any of the proxy solicitation firms going against a slate of directors,” said Seifert. On the specific topics of climate change and diversity, “for Berkshire to turn a deaf ear and a blind eye to these to me, at best, looks tone deaf.”

Succession
Buffett routinely faces questions about succession given his age and length of tenure. But in 2018, he took a step toward addressing the matter by promoting Greg Abel and Ajit Jain to vice chairmen roles, alongside Munger. Both Abel and Jain will be at the meeting. One lingering question is Todd Combs’ role leading Geico. Combs, a portfolio manager alongside Ted Weschler, took on that job managing the auto insurer in a move Buffett said was temporary. Any update on his responsibilities could be key, Shanahan said.

Stock Market
Many investors tune into Buffett’s annual meetings to hear his thoughts on the stock market. This year offers new themes he might address, after mania surrounding trading of GameStop Corp. and drama with Robinhood Markets Inc. Munger has criticized online brokers that attract inexperienced retail investors, saying they’re essentially offering gambling services. His comments in February also touched on firms that offer commission-free trading, which he called one of the most “disgusting” lies. “Robinhood trades are not free,” Munger said. “When you pay for order flow, you’re probably charging your customers more and pretending to be free. It’s a very dishonorable, low-grade way to talk. And nobody should believe that Robinhood’s trades are free.”