On Tuesday, April 11, Warren Buffett (Trades, Portfolio) loaded up on more shares of Japan’s top five trading houses, bringing Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) stake in each of them up to 7.4% according to CNBC. Buffett also revealed in an interview with Nikkei that he was considering raising his stakes in the five companies even further.
The companies in question are Japan’s major trading houses: Mitsubishi Corp. (TSE:8058, Financial), Mitsui & Co. Ltd. (TSE:8031, Financial), Itochu Corp. (TSE:8001, Financial), Marubeni Corp. (TSE:8002, Financial) and Sumitomo Corp. (TSE:8053, Financial). Also known as sogo shosha, these conglomerates are responsible for importing a wide variety of goods to the resource-scare Japanese economy, including energy, food and textiles.
In his interview with Nikkei, Buffett also revealed some of his motivations for buying shares of the Japanese trading houses, as well as part of the reasoning behind his rapid-fire turnaround sale of the majority of Berkshire’s stake in Taiwan Semiconductor Manufacturing (TSM, Financial).
Conglomerates with steady dividends
Buffett first revealed he had been buying shares of the five trading houses in August 2020 and, at the time, he commented that Berkshire planned to hold them for the long term and that it may purchase up to 9.9% stakes in each of the stocks depending on price.
Berkshire had been acquiring the shares through the Tokyo Stock Exchange throughout the preceding 12 months. The news did not reach the public until the stakes surpassed 5%, as there is no requirement for investment firms like Berkshire to report non-U.S.-listed stock holdings via their quarterly 13F filings.
At the time, investors speculated that Buffett liked the stocks because of their conglomerate structures, value characteristics and steady dividends. All five stocks offer a dividend yield of at least 3%, with some over 4% as of this writing. Their price-earnings ratios are all in the mid-single-digit range, and as the head of Berkshire, Buffett is very familiar with how conglomerates work.
Buffett confirmed in his recent interview with Nikkei that the high dividends were indeed a contributing factor in his decision to buy such significant stakes in the five trading houses, and so was their similarity to Berkshire in terms of their conglomerate business structure. He also added, "If they are repurchasing their shares, we generally regard that as a plus. We like the idea of the number of shares going down."
Is Buffett bullish on Japan?
Back in August 2020, Buffett said, “I am delighted to have Berkshire Hathaway participate in the future of Japan and the five companies we have chosen for investment,” leading to speculation that he was bullish on Japan in general, not just the trading houses. If one were to make a broad bet on the Japanese economy, the trading houses would be a good way to go because of their direct involvement with Japan’s imports.
Berkshire also holds yen-denominated bonds worth approximately 625.5 billion yen ($5.93 billion) that have varying maturities between 2023 and 2060, which can be considered another broad economic bet on Japan. According to Bloomberg, Berkshire is planning to offer more yen-denominated bonds across seven transactions, which could be priced as early as April 14 and are on track to bring the conglomerate’s yen-denominated debt over the 1 trillion yen mark.
Aside from these broad bets, Buffett has not yet highlighted any other specific Japanese stocks that Berkshire may invest in, though he did tell Nikkei that other Japanese companies are "always a matter of consideration… At the moment, we only own the five trading companies. There are always a few I'm thinking about."
Waiting on a deal
Buffett also revealed another motive for investing in the five trading houses: namely, the possibility that Berkshire might be called upon to provide funding for a deal of some sort. Funding multibillion-dollar deals is an extremely lucrative investment prospect that only major companies like Berkshire can take advantage of.
"We don't think it's impossible that we will partner with them at some point in the future in a specific deal," Buffett told Nikkei. "We would love if any of the five would come to us ever and say, 'We're thinking of doing something very big or we're about to buy something and we would like a partner or whatever.'"
One of the more recent examples of Berkshire earning a significant amount of money from funding a deal was Occidental Petroleum (OXY, Financial). Buffett helped fund Occidental’s acquisition of major competitor Anadarko by buying $10 billion worth of preferred shares that pay an incredible 8% dividend yield. As part of the deal, he also got 80 million warrants to buy common shares at a strike price just below $60 per share, which also turned out to be incredibly lucrative.
The problem with Taiwan Semiconductor
While the Nikkei interview mainly focused on Berkshire’s Japan investments, Buffett also gave some insight into why he decided to slash Berkshire’s investment in Taiwan Semiconductor by 86% in the fourth quarter of 2022 after having just acquired the stake in the previous quarter.
According to Buffett, geopolitical tensions were “a consideration” in the decision, but more importantly, he felt that there were better ways for Berkshire to deploy its capital elsewhere. In the past, Buffett has said one of the major reasons he might decide to sell a stock is if continuing to hold it comes with the opportunity costs of not being able to invest those funds in more lucrative opportunities.
