Warren and Charlie’s 50th anniversary addenda to this year’s BRK shareholder letter emphasise the importance of re-investment.
Warren writes that “a conglomerate such as Berkshire is perfectly positioned to allocate capital rationally and at minimal cost… we can move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise.”
The example he cites is See’s Candy, which has earned $1.9bn pre-tax since 1972 while requiring only $40m additional capital. But what if See’s had been an ordinary public company without someone in charge of capital allocation who could consistently re-invest that surplus elsewhere at a high rate of return?
This is often the case in the Asia Pacific region where I invest. I see many great businesses which generate a lot of free cash flow but with apparently limited opportunities to put it back to work. While the ideal would be to return the cash to shareholders, it often ends up sitting idly on the balance sheet or seeking growth in a series of poorly performing side lines.
Some examples in my opinion are: HSBC (5 HK), Wharf (4 HK), DuluxGroup (DLX AU), Sitoy (1023 HK), Tsingtao Breweries (168 HK), Galaxy (27 HK), Jollibee (JLB PH), Bosch (500350 IN) etc. I'm not as familiar with the US but arguably Microsoft and Apple fall into the same category.
I’m quite interested to know what other investors think. Do you take re-investment into account when assessing a company and its value? Do you shy away from good businesses with limited growth?