What began quietly years ago has grown into a defining long-term play for Berkshire Hathaway Inc. (NYSE:BRK) (NYSE:BRK), as the company signals no intention of slowing down or reassessing its $20 billion bet on Japanese trading companies, amid a changing macro climate.
What Happened: On Saturday, during Berkshire’s annual shareholder meeting, Warren Buffett addressed a question from the audience regarding the company's investments in Japan and his outlook on the same in light of a potential interest rate hike by the Bank of Japan.
Buffett said he was unfazed by the macro backdrop, stating, “I'll let the people of Japan determine their best course of action in terms of economics.”
He then went on to reaffirm his confidence in the five Japanese trading companies, Mitsubishi (OTC:MSBHF), Marubeni (OTC:MARUY), Mitsui (OTC:MITSY), Sumitomo (NYSE:SMFG) and Itouchi (OTC:ITOCY), while expressing continued optimism about both their prospects and the broader Japanese economy.
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Buffett noted that when he first acquired stakes in these trading houses six years ago, they were “selling at ridiculously low prices.” His conviction deepened over time, he added, as he got to know the companies and their leadership teams better.
“Japan's record has been extraordinary,” he said, pointing to the strong presence of several major American companies in the region, including several Berkshire holdings like Apple Inc. (NASDAQ:AAPL), Coca-Cola Co. (NYSE:KO), and American Express Co. (NYSE:AXP).
Buffett added that “in the next 50 years, we won't give a thought to selling those [Japanese trading houses] positions,” underscoring not only his own long-term conviction but also that of Berkshire Vice Chairman, and his newly appointed successor, Greg Abel.
Abel followed up by saying, “It's been a very good investment, but we really envision holding the investment for 50 years or forever,” adding that he hopes to “do big things with them globally.”
Why It Matters: Early last month, Berkshire was preparing another round of yen-denominated bond issuance, reportedly aimed at refinancing maturing debt and increasing its stakes in its Japanese plays.
Former Vice Chairman Charlie Munger had described the investment as a “no-brainer,” pointing to Japan's ultra-low borrowing rates, around 0.50%, and the attractive dividend yields of over 5% offered by the trading houses.
The company reported its first-quarter results on Saturday, with operating earnings falling 14% year-over-year to $9.6 billion. The decline was primarily due to a $1.1 billion hit to underwriting profits from wildfires in Southern California during the quarter.
Price Action: Berkshire shares were up 1.80% on Friday, and are up 0.35% after hours following the company’s first quarter results, according to data from Benzinga Pro.
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