Warren Buffett’s Berkshire Hathaway is out with its annual letter to shareholders.
And Buffett raises issues directly relevant to the Australian half-year reporting season, which is now largely complete.
Hasan S Tevfik, the Australia equity strategist at Credit Suisse in Australia, has put together three lessons for local investors from the annual letter.
Wide spread fear is your friend
“A year ago there was wide spread fear post the poor BHP result and the dividend cut,” says Tevfik.
“The reduction in distributions was the single most important reason why ASX 200 dividend fell by $3 billion during the 12 months to June 2016 vs the 12 months before.”
The BHP share price hit a 10-year low. helping to confirm a sense of fear among investors.
“But as Buffett notes, widespread fear is your friend,” says Tevfik.
“In hindsight, the poor result and dividend cut provided a great opportunity to buy BHP, not sell it.”
The world’s biggest miner confirmed that is it on track to raise its dividend by more than 200% compared to last financial year.
Meanwhile, the share price has since rallied almost 100%. Today BHP is trading at $24.85, up from $15.55 a year ago.
Buybacks are alright
Berkshire has a share buyback program and notes that it is great way of allocating capital if the price is right and there is nothing better to do with your cash.
“We too like buybacks,” says Tevfik.
“Not least because those Aussie stocks retiring equity have a good history of outperformance.”
Companies announcing buybacks during the current reporting period include RIO ($US500 million), AMP ($A500 million), Coca-Cola ($A350 million), Bluescope, Seven Group, Charter Hall Retail and Sirtex.
Restructuring should be a constant
Berkshires investment returns suggests it is an efficient corporate machine. It has increased book-value per share by an average of 19% a year since 1965.
“Still, Buffett notes that the company is undergoing constant restructuring and has been since it started in its current form more than 50 years ago,” says Tevfik.
He says share price moves during the Australia reporting period suggest investors are happy to pay up for companies pulling levers to increase returns rather than just waiting on the economy to carry them along.
The companies highlighted in Credit Suisse’s 17 restructures for 2017 have outperformed by an average 220 basis points since the report was issued earlier this month.