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After Warren Buffett, Berkshire Hathaway Likely to Return Capital to Shareholders

The company laid the groundwork for a successful transition around the early 2000s. 

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After Warren Buffett, Berkshire Hathaway Likely to Return Capital to Shareholders

Ivanna Hampton: You’ve written that the investing partners laid the groundwork for a successful transition more than 20 years ago. Talk about that.

Greggory Warren: Well, about a decade ago, we really started noting in our research that we felt that Berkshire would survive the eventual departure of both Buffett and Munger and that there was a groundwork there for a successful transition that they really started around the new millennium. We also acknowledge that the firm’s culture and management autonomy, the intrapreneurship feeling that combines everybody that they’ve ever acquired and worked with, really to a large degree, had become institutionalized within the company.

Now, the key focus here as it relates to the eventual transition is that they started dedicating greater amounts of capital to the acquisition of companies like Berkshire Hathaway Energy and BNSF, the railroad, that could absorb large amounts of excess cash thrown off by Berkshire’s operations, either through capital expenditures or both on acquisitions. The expectation here is it would leave less for Buffett and Munger’s successors to have to deal with over time.

That’s not to say that these successors won’t have anything to do, as Berkshire still generates more than $5 billion every quarter in free cash flow. The loss of both Buffett and Munger, in our opinion, would reduce some of the advantages that they’ve had historically, like being able to extract large amounts of rent from companies for the Buffett seal of approval when making large investments like they did in Bank of America about a decade ago.

On top of that, Berkshire’s biggest long-term hurdle in our view is its size, which means it’s going to be difficult for them to consistently find deals that not only add value to the firm but are really large enough to be meaningful—something we’ve really seen up close the past decade. Our take here is that Berkshire is eventually going to evolve from what has been a reinvestment machine into one far more focused on returning capital to shareholders. And this transition, in our view, will only be accelerated by the departure of Buffett and Munger.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Authors

Greggory Warren

Strategist
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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

Ivanna Hampton

Lead Multimedia Editor
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Ivanna Hampton is a lead multimedia editor for Morningstar. She coordinates and produces videos for Morningstar.com and other channels. Hampton is also the host and editor of the Investing Insights podcast. Prior to these roles, she was a senior engagement editor and served as the homepage editor for Morningstar.com.

Before joining Morningstar in 2020, Hampton spent more than 11 years working as a content producer for NBC in Chicago, the country’s third-largest media market. She wrote stories and edited video for TV and digital. She also produced newscasts, interview segments, and reporter live shots.

Hampton holds a bachelor's degree in journalism from the University of Illinois at Urbana-Champaign. She also holds a master's degree in public affairs reporting from the University of Illinois at Springfield. Follow Hampton at @ivanna.hampton on Instagram and @ivannahampton on Twitter.

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