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.
Latest posts by Dick Young (see all)
- Here’s How You Should Approach Investing in China - November 9, 2018
- The Best Investment Strategy is Simple, Like Analog Music - November 7, 2018
- Young Research’s Dynamic Maximizers – Shocking to Behold - November 2, 2018