May 242017
 

I am quoted in a TheStreet.com article on the possibility of Kraft Heinz acquiring Colgate-Palmolive or Mondelez International.

Cook’s comments, reported by the New York Post, suggest there’s a strong possibility that a friendly deal for Colgate-Palmolive could be struck reasonably soon, said David Kass, a clinical professor at the University of Maryland’s business school who follows Buffett and his company, Berkshire Hathaway (BRK.A) . The New York-based company could be attractive to Kraft Heinz, 3G Capital or Berkshire, Kass said.

One possibility is Buffett and 3G partnering to finance Kraft’s purchase of Colgate-Palmolive for as much as $85 billion, a premium on the company’s current $65 billion market capitalization, Kass suggested.

“It would be consolidated into Kraft-Heinz, and 3G would bring in its own management team,” Kass said. “3G Capital would want to acquire it if it felt that it wasn’t efficiently run and if they thought they could introduce efficiency.”

That theory is buoyed by the fact that Buffett and 3G have worked together before — on the purchase of Heinz, which predated its merger with Kraft. The combined company also has some synergies with Colgate-Palmolive. Colgate garners a large percentage of its sales outside the U.S., and it could use its international distribution chain as a channel for Kraft-Heinz, which has a much smaller international presence.

 The merged companies would also benefit from some economies of scale with U.S. retailers that sell both Colgate’s household products and Kraft Heinz’s food and beverages.

“Mondelez’s effort to buy Hershey suggests that it may be interested in buying something else as a defensive measure, so that they may be more difficult for someone like Kraft Heinz to swallow,” Kass said. “Mondelez has more international exposure than Kraft Heinz and putting the two together would open up more markets abroad, while bringing more domestic markets for Cadbury.”

 Posted by at 9:15 am
May 222017
 

In an SEC Form 4  filing after the market closed today, Berkshire Hathaway (Ted Weschler) reported a $45 million increase in its stake in Liberty Media SiriusXM Group (LSXMA and LSXMK) at $36.80 – $38.50 per share on May 18, 19, and 22, 2017.  Berkshire has now added $132 million to its $1.25 billion stake in Liberty Media SiriusXM Group since May 15.

 Posted by at 9:28 pm
May 152017
 

In an SEC 13F filing after the market closed today, Berkshire Hathaway reported several major changes in its portfolio, including a $20 billion position in Apple (129 million shares at closing price of $155.70) and a large reduction in its investment in IBM, both of which were revealed earlier.  Berkshire also disclosed a 50%, or $500 million, increase in its stake in Bank of New York Mellon, as well as the elimination of its $250 million position in 21st Century Fox.  There were also minor changes made to its almost $10 billion investment in the four major U.S. airlines (American, Delta, Southwest, and United Continental).

I was quoted in a Bloomberg article on these portfolio changes:

“Buffett has an overall optimistic outlook for the economy and the stock market,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business who has taken students to meet the investor. “This is consistent in that direction.”

 Posted by at 10:59 pm
May 112017
 

I am quoted in a Robert H. Smith School of Business (University of Maryland) article on Warren Buffett’s comments at the Berkshire Hathaway annual meeting on health care and corporate taxes:

Health insurance – not the U.S. tax code – is “crippling our business around the world,” Warren Buffett said during Berkshire Hathaway’s annual shareholder meeting on May 6, 2017, in Omaha.

In what New York Times columnist Andrew Ross Sorkin described as a “blunt” and “implicit rebuke” of his fellow chief executives, Berkshire Chairman Buffett said business leaders would be smart to shift their focus away from their tax bills and toward health care costs, which have been rising at an alarming rate, devouring profits. He blasted the recently passed U.S. House bill to repeal and replace Obamacare, and touted the broad benefits of a single-payer or universal type of health coverage for all U.S. citizens, perhaps with an opt-out provision that would allow the wealthy to choose a more bespoke plan.

Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business attended the Berkshire meeting, along with faculty colleagues Elinda Kiss and Julie Pavlovsky, and 10 Smith finance students. The annual meeting is an annual tradition for Kass, who has taken students to the “Woodstock of Capitalism” for the past 10 years.

Buffett told the crowd last weekend in Omaha that the healthcare overhaul bill provides a big tax cut for those who earn more than $250,000 per year from capital gains and would result in a 17 percent tax cut for him – roughly $680,000 of the $4 million in taxes that he paid in 2016.

Corporate taxes, he said, have declined over the past 50 years to 2 percent of gross domestic product, from 4 percent.

Berkshire Vice Chairman Charlie Munger referred to the overutilization of medical services for people he described as “almost dead,” Kass said. Munger gave an example of a Texas hospital where, he said, surgeons provide heart surgery to healthy patients. The outcomes of these surgeries are typically good, Munger explained, since the patients didn’t need heart procedures to begin with.

“Meanwhile,” Kass adds, “American corporations are disadvantaged by the statutory U.S. corporate tax rate of 35 percent, which is about double that of the likes of Germany, Britain and Canada. Furthermore, the inability of U.S. corporations to bring back profits earned abroad, without being subject to higher tax rates than our trading partners, puts the U.S. at a major disadvantage. Corporate tax reform, subsequently, is likely to play a major role in stimulating the economy to grow faster than its recent 2 percent rate.”

Kass is a former health economist for the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense and Bureau of Economic Analysis) and has closely followed Buffett’s investments and philosophy for more than 35 years. He weighs in on Buffett’s views on the healthcare and tax overhaul issues facing U.S. companies.

The tradition of U.S. corporations providing health insurance, tax free, to employees originated with World War II-era wage and price controls, Kass says. Companies at the time circumvented controls to compete for workers by offering health insurance. “The Affordable Care Act (ACA), requiring large employers to provide health insurance, continued this tradition,” Kass says.

“Healthcare may be judged in terms of cost, quality and access,” he adds.

“A major reason for the sharp increases in U.S. healthcare costs is the predominant fee-for-service model. The more that is provided, the greater the provider’s income will be. This provides a clear incentive for the over-provision of services to patients.”

“With respect to quality,” Kass says, “technology and research have produced much higher quality of care today than in the past.”

Some of the services, he acknowledges, come with a high price tag, such as medical resonance imaging (MRI). But those services are “very beneficial to patients and have helped to significantly increase life expectancy,” he adds. “Access has also substantially improved through the 1965 introduction of Medicare, along with Medicaid and the ACA. This, too, adds to total cost. But these additional costs have resulted in substantial benefits to society in terms of life expectancy and quality of life.”

“The ACA has its problems, which need to be addressed,” Kass says. “Providers need to be discouraged from offering unnecessary services. However, access to both preventive and necessary care should not be reduced. Healthcare research and technological improvements should continue to be encouraged.”

However, Kass adds, corporate taxes and healthcare are “two separate issues and should not be conflated. They are both very important and need to be addressed.”

 Posted by at 6:21 pm
May 082017
 

Warren Buffett was interviewed on CNBC today from 6:00 a.m. – 9:00 a.m. EST.

5 highlights are:

  1. Warren Buffett defended 3G Capital and Kraft Heinz in cutting unnecessary people to improve productivity and grow economy.
  2. Wells Fargo’s reputation has been hurt in the short run, but earnings power will not be hurt in the long run.
  3. Buffett is not currently buying Google and Amazon, but he is more likely to buy them than short them.
  4. The most important variable in determining market valuation is interest rates.  The market is “dirt cheap” if interest rates remain at current levels for  next 10 –  20 years.
  5. Charlie Munger advocates a single payer system for health care similar to Canada and Europe.
 Posted by at 9:14 am
May 082017
 
Since Berkshire’s A shares are currently valued at about $250,000 per share, the overwhelming majority of the purchasers are likely to be institutions such as pensions funds, mutual funds, hedge funds, or ETF’s, with the remainder being purchased by relatively wealthy individuals.  However, this has not always been the case.  In 1980, for example, Berkshire sold for only about $300 per share, and in 1985 for $2,000 per share.  Individuals likely comprised a majority of early investors in Berkshire.  Since Warren Buffett has mentioned that Berkshire attracts long-term investors and has the lowest turnover of shares of any company traded on the New York Stock Exchange, a large percentage of these shares may still reside with individual investors.
The B shares were first issued in May, 1996 at $1,000 per share, with the original Berkshire shares, now referred to as A shares, valued at $30,000 per share.  In effect, the B shares represented a 30 to 1 stock split.  In January, 2010, the B shares were then split again, this time 50 to 1 in conjunction with Berkshire’s acquisition of Burlington Northern Santa Fe Railroad.  At that time, Berkshire’s A shares sold for $120,000 per share, and the B shares sold for $80 per share.  As a result, each Berkshire A share is valued at 1,500 times each B share.  Berkshire’s B shares were then included for the first time in the S&P 500 Index because of their increased liquidity resulting from a much lower price and many more shares outstanding.
Currently, about 200 shares of Berkshire A are traded each day.  With an approximate market value of $250,000 per share, that represents a daily dollar volume of about $50 million.  By contrast, approximately 4 million shares of Berkshire B are traded each day.  At a recent price of $167 per share, this represents a daily dollar volume of $670 million, or approximately 13 times that of the A shares.  There are currently 1.64 million Berkshire A shares (including B share equivalent shares) outstanding resulting in a total market capitalization of $410 billion, which recently resulted in Berkshire being ranked as the fifth largest company in the S&P 500.
According to Yahoo Finance, the major holders of Berkshire A shares are:

Major Holders (Berkshire A Shares)

Currency in USD

Breakdown
41.38%Shares Held by All Insider and 5% Owners
27.30%% of Shares Held by Institutional & Mutual Fund Owners
46.57%% of Float Held by Institutional & Mutual Fund Owners
810Number of Institutions Holding Shares
Similarly, the major holders of Berkshire B shares are:

Major Holders (Berkshire B Shares)

Currency in USD

Breakdown
0.25%Shares Held by All Insider and 5% Owners
64.30%% of Shares Held by Institutional & Mutual Fund Owners
64.46%% of Float Held by Institutional & Mutual Fund Owners
1,759Number of Institutions Holding Shares
From these tables, institutions and mutual fund holders own only 27% of the A shares, but 64% of the B shares.  That can be explained by insiders and 5% owners holding 41% of the A shares and less than 1% of the B shares.  According to Berkshire’s Notice of Annual Meeting of Shareholders May 6, 2017, Warren Buffett beneficially owned 38.3% of the A shares as of March 8, 2017.  The insiders primarily accumulated their shares in the 1960’s and 1970’s when Berkshire traded at less than $100 per share.
It should be noted, however, that these tables imply that individuals (other than insiders) hold about 31% of the A shares and 35% of the B shares.  The 1,500 to 1 stock split has resulted in opening up ownership in Berkshire to individual investors for as little as $167 (May, 2017) for one class B share vs. $250,000 per class A share.
From Berkshire Hathaway’s 2016 Annual Report (p. 115):
“Berkshire had approximately 2,300 record holders of its Class A common stock and 20,200 record holders of its class B common stock at February 15, 2017.  Record owners included nominees holding at least 430,000 shares of Class A common stock and 1,300,000,000 shares of Class B common stock on behalf of beneficial-but-not-of-record owners.”
 
 Posted by at 1:48 am
May 012017
 

I am quoted in a Washington Post article on Apple’s $250 billion in cash, and Berkshire Hathaway’s $86 billion in cash.

“Companies have been accumulating cash over many years,” said David Kass, a finance professor at the University of Maryland’s Smith School of Business. “The perverse disincentives of our current corporate tax system are discouraging corporations from bringing back international profits to invest in the U.S.”
 

Kass said he expects a major return by Apple to shareholders through several vehicles, including an increase in the Apple dividend, stock buybacks and a big one-time dividend. He said it is less likely that Apple would make acquisitions, given the company’s historic aversion to them. Berkshire Hathaway has little in overseas exposure because most of its profits are made in the United States. And Buffett has been reluctant for Berkshire Hathaway to pay dividends, arguing that he can make better use of the money by finding smart investments.

“His companies are sufficiently profitable, and he is very patient, that his cash has accumulated over several years,” Kass said. “But if the corporate rate is lowered from 35 percent to 15, 20, 25, it will result in additional profits for Berkshire and just about every other American-based corporation.

“If that takes place, then Warren Buffett’s pile of cash will increase much further,” he said.

 Posted by at 8:51 pm