Warren Buffett’s writings, proclamations — indeed, his offhand utterances — comprise a bible of investing for the legions who follow the Berkshire Hathaway founder.
How fitting, then, that his likely successors are named Jain and Abel.
The Oracle of Omaha announced on CNBC that he was elevating the two longtime Berkshire executives — Ajit Jain, 66, and Gregory Abel, 55 — to vice chairs on the board of directors of his $500 billion conglomerate. Its dozens of businesses seep into every corner of American life, from bricks to banks and from Coke to See’s Candies.
The move sent reverberations through the nation’s financial circles, spurring a new round of conversation about the future leadership of one of the most successful businesses ever.
Jain runs the company’s vast reinsurance groups and is known for brilliant risk analysis and capital allocation. Abel runs Berkshire Hathaway Energy and has earned Buffett’s praise for his operations and acquisition skills.
“The promotion of these two men indicates that most likely one, or possibly both, of them are his successor,” said Whitney Tilson, a Berkshire shareholder for more than two decades and a close follower of Buffett, 87, and his longtime business partner and sidekick, Charlie Munger, 94.
Tilson and other Berkshire observers are betting on Abel as the sole successor because of his relative youth and because Jain has made it clear he wishes to remain focused on Berkshire’s vast, and highly profitable, insurance operations.
“We think Greg Abel is the guy,” said Greggory Warren, a Berkshire Hathaway analyst with Morningstar. ” There’s going to be a big microscope on whoever takes over after Buffett, and Jain is not interested in that kind of limelight.”
The Jain and Abel ascension followed a momentous 2017 for Berkshire Hathaway that saw the company’s “A” shares break $300,000 per share. It closed at $320,000 on Thursday, but you can still buy the Berkshire “baby B” shares for $213.
Also last year, Berkshire’s cash-on-hand surpassed $100 billion as Buffett/Munger scurried to find new investments. The Republican tax plan that became law late last month gifted a one-time, $37 billion windfall to Berkshire shareholders, which helped raise the stock price.
Not least of all, Buffett won a $1 million, decade-old bet with a hedge-fund bigwig. Buffett said he could do better than a portfolio of hedge funds by investing in boring, index fund over 10 years. Buffett gave the money to Girls Inc., one of his favorite charities.
So where does Berkshire Hathaway go from here?
Morningstar’s Warren said the windfall from the tax cut has already been built into the stock’s current price. But he sees a possible one-time dividend coming shareholders’ way in 2019. Berkshire has never paid a dividend in its 50-plus years because Buffett has maintained that he could put the money to more productive uses through investments. But that has changed as the cash surpassed $100 billion this past summer.
“Buffett has sort of painted himself into a corner,” Warren said of the prospects for a dividend. “At last year’s annual meeting, he said if here were sitting here in two years with $150 billion in cash on the books, he basically can’t defend that to shareholders.”
“With investment opportunities few and far between, the company continues to build up large amounts of cash on its balance sheet,” Warren said in a recent analyst’s note. “The firm should consider a large one-time special dividend, returning a decent amount of excess cash to shareholders in the near to medium term.”
Warren says he expects a one-time, $20 billion dividend in 2019, which would still leave an estimated $130 billion in Berkshire coffers. That’s more than enough to cover working capital and still have $100 billion for acquisitions.
“Paying a dividend would make the stock appealing,” said Steve Johnson, a portfolio manager for Adviser Investments who only invests in dividend-paying stocks. Johnson said if Berkshire starts paying dividends, Adviser would likely jump in. If not, he sees a dividend more likely at a post-Buffett Berkshire.
The Oracle isn’t going anywhere just now. Buffett said ”I’m in remarkably good health” during his CNBC interview.
Tilson sees Buffett running the show for another five to seven years.
“He is incredibly energetic, healthy and mentally he has never been sharper,” Tilson said, who three months ago closed his hedge fund and now operates an online investing education service called Kase Learning. “I pray in the church of Buffett and Munger. They have been my mentors and teachers as an investor, but they have had an even bigger impact on the non-investment things through the life lessons they have taught.”
Buffett and Munger in the last decade have built a stable of capable Berkshire executives, including Todd Combs and Ted Weschler who each run an investment portfolio in the $10 billion range.
“I look at post-Buffett Berkshire as having a team approach,” Warren said. “Greg will be the end-all, but Todd and Ted will have a lot of input. Ajit will probably also be brought into the equation when they are looking at things from a risk perspective.”
Jain may not be able to avoid publicity when the company holds its annual meeting in Omaha in May. Buffett and Munger hold court on a stage before 40,000 shareholders (and more in adjoining conference rooms and through lives streaming) for hours, fielding questions, munching on candy and sipping soda. The meeting draws tens of thousands and is referred to as “Woodstock for Capitalists.”
“I would not be surprised to see both Jain and Abel joining vice chairman Charlie Munger and chairman Warren Buffett on the stage at the upcoming May 5 meeting, not only answering shareholder questions, but also eating See’s Candies’ peanut brittle and drinking Cokes,” said David Kass, a finance professor at the University of Maryland.