Preferred Stocks
Buffett has shown a preference for obtaining yield by providing financing to other companies with preferred stock at higher interest rates than available in the corporate bond market. During the financial crisis in 2008, he bought $5 billion of preferreds from Goldman Sachs Group Inc. and $3 billion from General Electric Co. with 10 percent yields. The companies have since redeemed those securities.
The following year, Berkshire purchased $3 billion of 8.5 percent convertible preferred stock from Dow Chemical Co. to help it pay for its acquisition of Rohm & Haas Co., and in 2011 it bought $5 billion of 6 percent securities from Bank of America Corp. This year, Berkshire was part of a group that struck a deal to acquire HJ Heinz Co. in a transaction that includes an $8 billion preferred stake for Buffett with a 9 percent yield, and last month he agreed to refinance $94 million of debt at newspaper publisher Lee Enterprises for 9 percent.
‘Good Time’
The Federal Reserve has kept interest rates near zero since December 2008 to bolster the economy, pushing spreads on U.S. corporate debt to record lows. The extra yield investors demand to hold investment-grade bonds instead of Treasuries has tightened to a five-year low of 143 basis points from as high as 656 basis points in December 2008, Bank of America Merrill Lynch data show. Over that period, investment-grade yields have fallen to a record low 2.65 percent from 8.59 percent, the data show.
A basis point is 0.01 percentage point.
“It continues to be a good time to issue debt, whether you’re talking about absolute yield or relative spread levels,” Thomas Chow, a Philadelphia-based money manager at Delaware Investments who helps oversee about $135 billion, said in a telephone interview. Berkshire is “a high-cachet name,” creating demand for its securities, he said.
Bonds from Berkshire are the worst performers in the Bank of America Merrill Lynch U.S. Property & Casualty Insurance index this year through May 7, rising an average 0.8 percent, compared to the 3.2 percent index gain.
Berkshire Acquisition
“They tend to trade a little bit cheaper because of the company makeup, but I don’t think it’s anything specific to Berkshire as a business,” Matthew Duch, a fund manager at Calvert Investments Inc. in Bethesda, Maryland, which oversees more than $12 billion in assets, including Berkshire debt. “Berkshire tends to be a name that people are either in need of have too much of.”
In line with Buffett’s advice to stick with equities, Berkshire’s Class A shares have returned 24 percent this year. The shares, unsplit since Buffett bought the company in 1965, rose 1 percent to $166,272.78 yesterday.
Buffett began buying shares in Berkshire Hathaway, then a textiles business, in 1962 after studying under Benjamin Graham, a Columbia University professor who co-authored the value- investing guide “The Intelligent Investor.”
Berkshire owns a stable of insurance companies including Geico and General Re, and companies ranging from MidAmerican Energy to chemicals maker Lubrizol to the Burlington Northern Santa Fe railroad. It also has minority stakes in companies that include International Business Machines Corp. and Coca-Cola Co.
The parent company and its finance arm are rated Aa2 by Moody’s Investors Service, the third-highest grade.
“The argument is that with yields on high-quality debt as low as they are, the compensation you’re receiving for taking risk has declined,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “Still, there are natural buyers of long-term debt who aren’t swayed by the relative value between credit and equity. And because there’s little long-term debt sold, what is issued is gobbled up quickly.”