Investment chops keep Buffett in gravy as sauce giant feels squeeze
Warren Buffett is a legendary stock investor. Maybe his accomplishments as a lender of last resort should be more celebrated. His reputation has taken a hit following poor results from Kraft Heinz, the United States consumer foods company he controls with Brazilian investment firm 3G Capital. Kraft Heinz’s shares are now off a staggering two-thirds from their 2017 peak. But consider how he got involved with 3G Capital and you will appreciate his fixed income genius.
When 3G and Berkshire Hathaway bought Heinz at a transaction value of US$28 billion ($41b) in 2013, each put in a little more than US$4b of common equity. But Buffett also bought US$8b of preferred stock earning a juicy 9 per cent yield in a low-interest-rate environment.
Taking a senior position in the capital structure limited his exposure to a default. This left a near doubledigit return with little risk. It was a brilliant move few others had the muscle to pull off.
In 2015, when Heinz merged with Kraft, the new company immediately sold junk bonds so it could redeem the preferred stock and eliminate that expensive coupon payment to Berkshire. Buffett’s common equity stake in Kraft Heinz is today worth roughly US$11b. He paid roughly US$9b for it, so he is still ahead.
Judged by its annualised rate of return standard, that 9 per cent preferred stock dividend was a much better investment. Buffett also made fabulous profits on preferred stock rescue financings at Goldman Sachs, Bank of America and General Electric. He put US$13b in total to work at institutions that were too big to fail.
Such value investing opportunities have been limited in the last decade, as Buffett has lamented. His cash hoard stands at US$112b.
Berkshire Hathaway stock has produced an annualised return of 12 per cent in the decade since the financial crisis, one percentage point behind the S&P 500. Turbulence cannot come fast enough for Buffett.