Warren Buﬀett could lose an $8-per-second (yes, per second) windfall on his is Dow Chemical Stock. The Wall Street Journal lays bare Warren Buffett’s Dow problem.
Warren Buffett’s Berkshire Hathaway lent Dow Chemical $3 billion to help finance its purchase of Rohm & Haas in 2009….
But a recent rally in Dow’s stock is putting that income stream at risk.
Shares of Dow have spent much of the past month hovering above $53—perilously close to a level that would cause Berkshire to lose a $255 million-a-year dividend….
Dow has been on the hook for paying an 8.5% annual dividend on three million shares of preferred stock.
WSJ concludes: Those shares have resulted in more than $1.5 billion for Berkshire. As Mr. Buﬀett likes to say, that amounts to $8 a second. But the agreement has an escape hatch: If Dow’s shares exceed $53.72 for at least 20 trading days in a 30-day period, the chemical company can convert Berkshire’s preferred shares into common stock.
Here’s the little rub for Berkshire Hathaway. Berkshire, today, has a $112 billion portfolio. To take a meaningful 3% position, he needs to invest $3.4 billion. To stay under the 5% ownership Buffett must buy firms with caps above $68 billion. There are perhaps only 70 U.S. firms that meet that criteria.
To stay under the 10% ownership threshold, Buffett can invest in firms with market caps as small as $34 billion. There are about 160 of those.
The IBM position Buffett took a few years back was a $13.7 billion investment. To stay under the 5% threshold at that size investment, Buffett would need to invest in firms with caps of more than $274 billion (IBM has a $152 billion cap). There are but eight of those.
To stay under 10%, he could go down to $138 billion. There are still only 31 of those.
Investing in Berkshire Hathaway today can be much more about market cap restraints than it is about value investing! No Thanks.