FOR BUFFETT, AMEX IS A GREAT PLACE TO STASH CASH
If billionaire investor Warren E. Buffett needed a sobriquet, the choice could well be "Dr. Feelgood." After all, the managements of the companies in which he invests feel pretty darn good when Buffett's Berkshire Hathaway Inc. tosses a few hundred million dollars their way. He's no takeover threat, he's a long-term investor, and he doesn't second-guess CEOs. What's more, there are legions of investors, big and small, who piggyback his picks--and that gives a stock an additional boost.
The 59-year-old Nebraskan played doctor again on Aug. 1, administering $300 million of much-needed capital to American Express Co. Buffett's purchase of AmEx's preferred shares, which would be exchanged for a 2.5% stake in the company, gives the financial-services giant access to low-cost equity capital. And it allows AmEx to raise the money without immediately diluting the equity of its common stockholders. All in all, it's a pretty good deal for AmEx.
At first glance, the AmEx deal doesn't look so sweet for Buffett and his 6,300 shareholders. The special preferred shares pay an 8.5% dividend. Period. Buffett got no promises of board seats, no voting rights, and no future discount-purchase rights. Moreover, he has no downside protection should the stock price fall below the current price of about $25 a share. And unlike the special preferred shareholder deals he cut with Champion International, Gillette, Salomon, and USAir, there's not much upside potential.
SLIM TIMES? In fact, if AmEx's fortunes turn around fast, the investment could be short-lived. AmEx has the right to buy the stock back on a sliding scale of prices that offers at most a 37.3% profit. Even John J. "Jack" Byrne, an AmEx board member who initially pitched the AmEx investment during a telephone conversation with his friend from Omaha, was amazed that Buffett would agree to a cap. "Mr. Buffett hates that," Byrne declares. "His genes go against it." Buffett admitted as much in an interview with BUSINESS WEEK. "I would like it better if our upside was uncapped." Buffett says he ponied up for AmEx for the same reasons he invests in any business: He likes the American Express franchise, thinks he understands the business, and he knows and respects CEO James D. Robinson III. "We're buying to be in with Jim," he says.
The AmEx investment doesn't sound like the work of someone who made himself a billionaire and enriched shareholders, too. Berkshire Hathaway's net worth has grown at a compounded rate of 23.3% a year since Buffett took over the onetime textile company in 1965.
But the move could be a sign that slim times face investors as the 1990s take shape. Ross A. Webber, a Wharton School professor who has studied Buffett's management style, characterizes his move as "newfound `90s realism. The returns of the `80s are not around anymore, absolutely not."
Buffett, however, warns against analyzing his latest move as a portent. "For me, it's what's available at the time," he counsels. There's no particular category of investment or tactic that will define the 1990s, he says. "We're not interested in categories per se. We're interested in value."
Investors seem happy enough with Buffett's latest foray. Since the AmEx deal was announced, Berkshire Hathaway is up $125 a share. O. K., that's not as big a deal as it sounds, since Berkshire Hathaway--the highest-priced stock on the New York Stock Exchange--sells at a cool $8,650 per share. Buffett doesn't believe in stock splits, and he doesn't pay dividends. So the earnings in insurance, candy, encyclopedias, newspapers, furniture, and vacuum cleaners, plus hundreds of millions of dollars in dividends from stocks must be reinvested.
SWEET ENOUGH. That, indeed, is the key to the AmEx deal. In a period of declining interest rates, Buffett needs a place to stash his cash. The AmEx preferred may pay only 8.5%, but since corporations can exempt 70% of dividend income from taxes, it's like earning a fat 11.6%. U. S. Treasury bills yield less than 6%, and after taxes, he'd be lucky to net 4%.That healthy return is why Buffett is willing to forgo other sweeteners. He doesn't care about the lack of voting or purchase rights. And since he's already traveling 60 days a year to tend to the four boards on which he already sits, he's not looking to join another.
Then, with the stock market flirting with a new high again, AmEx didn't have a lot of competition for Berkshire Hathaway funds. "We find very few things we really like," says Buffett. "The second half of 1990 was a lot friendlier time to find a bargain." That's when he made one of his boldest and most controversial moves--a $289.4 million investment in Wells Fargo & Co. He bought 5 million shares, or 9.8% of the common, at an average cost of $57.88 per share. The stock rose to nearly $100 before concerns about Wells's exposure to California real estate sent the price plummeting. Still, the stock trades at $70. Buffett also took advantage of last year's bear market to take a stab at RJR Nabisco Inc. bonds--a successful first foray into the junk arena. Since junk-bond prices have rebounded this year, Buffett doesn't see any more good opportunities in that market.
'ONE GOOD IDEA.' Despite his savvy moves last year, Berkshire Hathaway's 1990 net worth rose only 7.3%, or $362 million. That was the smallest percentage gain in years and the closest Buffett has come to fulfilling his own 1989 forecast that Berkshire Hathaway's net worth would fall sometime before 1992. During 1990, the company's stock traded as low as 5500. Even now, after a 57% rebound from last year's bottom, the share price is still 2.5% below the all-time high of 8875 set in late 1989.
Already, 1991 is shaping up as a much better year. Three of Berkshire Hathaway's four core stock holdings--Washington Post, Coca-Cola, and discount insurer Geico--are trading at or near their 52-week highs. Only Capital Cities/ABC Inc., hard hit by the media industry doldrums, continues to lag.
Buffett always keeps his eyes peeled for a new investment opportunity. "Each year, I feel lucky if I get one good idea." In the AmEx investment, Buffett thinks he's got his quota for 1991 in the bag.David Greising in Chicago