Buffett Gives A Master Class On Value Creation

Warren Buffett’s Berkshire Hathaway (BRK.A) announced on Saturday that profits rose 45% year-over-year to $7.3 billion. Buffett knows how create value. He’s been doing it for six decades.

Now the so-called Oracle of Omaha is giving investors a blueprint for success. The strategy involves companies with strong cash flow and how executives deploy it. The era of share buybacks is here.

Investors should consider buying Chubb (CB). Let me explain.

Buffett is widely considered to be the most accomplished investor in a generation. After taking control of Berkshire Hathaway in 1962, he transformed the failing textile business into an iconic American investment holding company. Shares of the Omaha, Nebr.-based business now trade on the New York stock exchange for $479,345.

For most of the last 60 years Buffett was buying up shares of privately held and public businesses with operations in the insurance, banking, industrial and consumer discretionary sectors. He has even dabbled in foreign firms, buying a 7.7% stake in BYD in 2008, a Chinese electric car maker.

Currently, the company holds sizeable investments in Coca Cola (KO), Heinz (HNZ), American Express
AXP
(AXP), Bank of America
BAC
(BAC) and Apple
AAPL
(AAPL), according to a February 14 filing at the Securities and Exchange Commission.

All of these firms are prolific generators of free cash flow.

Cash flow is one of Buffett’s first hurdles of investment worthiness. Cash is like security. He’s famous for the adage “only when the tide goes out do you discover who’s been swimming naked”.

There is something else investors should know about these businesses. Executives are buying back company stock in the open market at a furious clip.

Buybacks bolster earnings by spreading profitability over fewer shares. The trajectory of earnings per share is a closely watched metric by investment analysts. Some consider share repurchases, along with dividends, a method to return capital to shareholders.

Apple bought back $20 billion worth of stock in the fourth quarter of 2021 alone. For the whole of the year purchases topped $85.5 billion.

Buybacks played a role in the Q4 results at Berkshire, too. The company spent $6.9 billion during the quarter on share repurchases. For the year, the total was $27.5 billion, up from $22 billion in 2020. Even still, the annual report shows that Berkshire ended 2021 with $146.7 billion in cash on hand.

Chubb Limited (CB) is not one of the companies held by Berkshire. The Switzerland-based insurance holding company competes directly with GEICO, a core privately held Berkshire business.

Among publicly traded insurance firms Chubb is king. With a market capitalization of $88.7 billion it is the largest property and casualty insurer. And during Q4 of 2021 the firm agreed to buy the insurance assets of Cigna
CI
(CI) in seven key Asia-Pacific markets. The purchase price was $5.75 billion in cash. The acquisition means that Chubb is now active in 54 countries, with interests in P&C insurance, agricultural, commercial, life and reinsurance.

Executives noted on February 2 that profitability for its core commercial business is running at record levels. The firm has been able to pass on double-digit P&C rate increases and expand underwriting margins, while maintaining strong renewals. P&C underwriting income surged to $1.3 billion, up 31% from a year ago. Operating cash flow during the quarter reached $2.6 billion.

A large portion of that money is going into share repurchases. During Q4 Chubb executives spent $905 million on share buybacks, according to a filing at the SEC. In a press release last July the Chubb board of directors authorized a one-time $5 billion share buyback program that will run through June 2022.

Successful longer-term investing requires discipline and strategy. This is harder to do than it seems, especially now with geopolitical and inflation worries in the forefront. Warren Buffett is giving investors a gift. He’s shinning a light on an investment strategy that works.

Chubb shares trade at only 12.7x forward earnings and 2.2x sales. The dividend yield is 1.55%. Longer-term investors should consider adding the stock into weakness.

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