Warren Buffett's Investment in 5 Japanese Trading Houses
Timing, Valuation, Dividend Yield, Growth and the Overall Importance to the Japanese Economy
The intelligent value investors that he is, when everyone was too focused and obsessed with the US markets which has led to the overheating in valuations in the US, Buffett shifted gears towards the other side of the universe which was a ripe hunting ground for undervalued companies.
Buffet was able to buy, almost in equal weights, five of the largest trading houses in Japan, at an average dividend yield of 5.3% at a P/B of 0.8x over a span of 12 months until it was first disclosed in November 2020.
Warren Buffett was able to reap the benefits of the three main drivers of return: multiple expansion, earnings growth and share buybacks + a very large dividend kicker.
Since his purchase, dividends has grown by +50%, bringing his effective yield to a beautiful 8.8% without any physical or mental effort. P/B has also expanded by more than 35% since his acquisitions, notably purchasing companies at significant discounts to their book values, with the remainder of his returns being generated from book value appreciation.
More Insights from the CNBC Interview:
Warren Buffett came to Japan to highlight Berkshire Hathaway's growing investments in the country's five biggest "trading houses," large companies that "import goods and services across multiple industries vital to the nation's economy, from automobiles to infrastructure to clothing."Â
After initially buying stakes in 2020 of slightly more than 5% in Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp., Buffett revealed this week that Berkshire now owns 7.4% of the companies' outstanding shares.
In his "Squawk" interview, Buffett said when he first invested in them, he was "confounded" that he could buy into companies with strong earnings and growing dividends at what he considered a "ridiculous" price, especially when compared to the near-zero interest rate at the time.
He has not been disappointed, telling Becky Quick, "It's turned out to be better than I thought it would be."
Another plus for Buffett is that he "generally understood what they did" since they "were similar to Berkshire in that they owned lots of different interests."
He and Greg Abel, Berkshire's vice chairman for non-insurance operations and Buffett's designated successor as CEO, had a "terrific" time meeting with top executives of the five firms and "we couldn't feel better about the investment."
While Buffett has promised not to buy more than 10% of any the companies' shares without their permission, he did indicate there may be more purchases to come.
And Abel said that in their meetings, they promised to give a quick response (Buffett will "answer the phone on the first ring") if the companies come up with any incremental opportunities, "the bigger the better."
Source: CNBC