In his recent interview on the Colossus Podcast, Chris Bloomstran explained why Berkshire Hathaway is a ‘bond’ that yields 8.3%. Here’s an excerpt from the podcast:
Bloomstran: I look at Berkshire. If you’ve got $50 billion in economic earning power today on a business that now has a market cap of 600 billion, let’s call it, and trading at 12 times earnings. On 50 billion you’re trading at 600, you’re trading at 12, you’ve got an 8.3% earnings yield.
To me, the best way to explain Berkshire and the advantage of it is it’s a bond where as an acquirer of Berkshire, as a shareholder buying shares today, at an 8.3% earnings yield, when Berkshire’s buying stock back at today’s price, they’re buying it at 8.3%. But the entirety of their profits that are retained after taxes are paid by Berkshire are being reinvested at 10 to 12%. That’s still the hurdle rate. That’s on the 30 year bond.
I did some math on the 30 year. I think I identified the worst performing bond in the history of the United States. Government bond. They issued a 2% in 2020 on 2/15/20. And it traded up, as interest rates dropped during the pandemic, to 120. That thing’s now in the low ’70s. It’s lost 40% of its price.
So you bought that thing at the peak, you bought it at 120, you’re making two coupon. You’re going to lose 20 points to maturity. You’re going to mature at par, but you’re investing at 2. But every time you get your coupon payments, semi-annual coupons, 1% every six months, if you’re going back into the bond market, you’re buying whatever the current yields are. So if interest rates average 2 or 3 or 4%, you’re starting off at 2 and you’re buying at 2 and 3.
In Berkshire’s case, you’re buying it at 8.3, they’re reinvesting it at 10 to 12. And they have a durable set of places to go invest the money and not blow it up. And nobody does that. Nobody does that. There’s just such a need to spend. The media and these boo birds that watch Berkshire and lament over this enormous cash balance. Why can’t they spend it? Why can’t they spend it?
They’ll spend it on their time and they’ll lay it out on very attractive terms. And they’re not going to put it in places that are going to blow it up.
You can listen to the entire interview here:
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