Berkshire Hathaway fell 3% in premarket trading as longtime Berkshire Hathaway CEO Warren Buffett said he plans to recommend to the company's board that Greg Abel take over at the end of the year. Abel was named Buffett's successor back in 2021.
With Warren Buffett's impending departure as Berkshire Hathaway's CEO, changes will be coming to the company he guided so brilliantly for 60 years.
The changes could be in management, capital management, and style, although nothing major will probably occur before the 94-year-old Buffett steps down at the end of the year.
On Saturday, when Buffett made his bombshell announcement about his plans, he suggested to the crowd at the company's annual meeting in Omaha, Nebraska, that he would have a limited, informal role with his successor, Berkshire's new CEO Greg Abel. This assumes Berkshire's board OK's Abel's selection at a meeting on Sunday.
Abel, who soon will turn 63, will get the top job at an age when many CEOs are staring at retirement. But Buffett has said the usual retirement rules don't apply at Berkshire. And an energetic Abel seems poised for a long run.
Buffett's new role perhaps could be like the one that Charlie Munger, the longtime Berkshire vice chairman, had with Buffett for many years. Munger died at 99 in 2023.
Whether Buffett will remain chairman isn't clear right now. If he gives up the chairman role, who would get it? A top contender is Buffett's son and board member Howard Buffett, 70, who has his father's endorsement.
CEOs often give up their chairman status when they retire to give more latitude to their successors.
Berkshire also could start paying a dividend, perhaps as early as 2026 given its enormous cash reserves of nearly $350 billion on March 31, a record. Buffett has long opposed a dividend, arguing that cash in his hands is better than in the hands of shareholders.
But it may be tougher to make that argument about not paying a dividend when Abel is in charge. His strength in management, not investments.
And importantly, will Berkshire stock keep attracting investors the way it has under Abel's leadership?
Buffett is incomparable.
Before the meeting, KBW analyst Meyer Shields told Barron's that Buffett is "the most iconic CEO in the history of CEOs."
Abel will be filling perhaps the big shoes in Corporate America and it's a tribute to him that he is willing to take on the role and has waited patiently for it since 2018, when he was named a Berkshire vice chairman and head of the company's non-insurance operations.
Buffett's timing was perfect in a sense because the stock finished Friday at a record high and its valuation is at a 15-plus-year high based on its price-to-book ratio, now around 1.8 times, against an average of closer to 1.5 times in the past few years.
Buffett's star has never burned brighter with Class A shares finishing Friday at $809,000, up about 20% this year, against a 3% drop in the S&P 500 index. Those shares are up 40,000-fold since Buffett took over in 1965, a roughly 20% annualized return against about 10% for the S&P 500.
At a dinner Saturday night in Omaha, a group of investors suggested the stock could be down 3% on Monday in reaction to Buffett's announcement. While his departure was inevitable, the timing surprised investors.
The premise behind the expectation of a drop on Monday is that a Berkshire without Buffett at the helm will be less desirable to investors, many of whom are sitting on huge profits.
Any management changes after Buffett's department could be significant.
Insurance chief Ajit Jain, 73, could retire, and perhaps be replaced by a well-regarded insurance executive, Joe Brandon, who came to Berkshire in 2022 when Berkshire bought Alleghany, which Brandon had led.
The management of Berkshire's nearly $300 billion equity portfolio is unclear. Many Berkshire followers had assumed that investment managers Todd Combs and Ted Weschler, who now run about 10% of the $300 billion equity portfolio, would take over all of it after Buffett departs.
But Buffett has said he wants Abel to oversee the equity portfolio just as he has done.
That, however, may not be feasible given that Abel will have his hands full running a $1.2 trillion market-value company with dozens of divisions, including the Burlington Northern Santa Fe railroad and Berkshire Hathaway Energy, a big utility.
Investor Bill Smead, a co-manager of the Smead Value fund, wrote that Combs and Weschler should be promoted to leading roles with the equity portfolio, whose largest holdings include Apple, American Express, Coca-Cola, and Bank of America.
Abel knows the utility and energy businesses very well, having headed Berkshire's energy unit before coming to the parent company.
Those could be areas for investments and acquisitions, including possibly buying the rest of Occidental Petroleum, which Berkshire now owns 28%.
Occidental's CEO, Vicki Hollub, has said that being part of Berkshire would "be a dream come true." Buffett, however, has said Berkshire isn't interested in owning the whole company.
Abel will take control of a company in great shape. While Berkshire's operating earnings in the first quarter were down 14%, the company still earned nearly $10 billion after taxes and is sitting on nearly $350 billion of cash and equivalents.
What will Abel do with that cash, which is growing by about $40 billion annually from earnings alone? He didn't say much at the annual meeting -- except noting he would maintain a strong balance sheet and invest in Berkshire's many businesses.
Last year, Berkshire was a big net seller of stocks -- over $130 billion, mostly Apple. In the first quarter, it was net seller of about $1.5 billion. Buffett intimated that Berkshire wasn't a buyer in the market dip in early April.
Berkshire is doing little with its cash. The company hasn't repurchased stock since May of last year, presumably because of an elevated valuation.
Most other companies with so much cash would be paying a cash dividend and contemplating a one-time special dividend. Berkshire needs a chunk of that cash to meet insurance obligations since it has a small bond portfolio. But the bulk of it could be deployed for investments.
Abel is a well-regarded manager who Buffett lauded at the annual meeting, calling Abel "better" at the job than Buffett with a more hands-on approach.
"I'm blown away by his capacity and bandwidth," said Brooks Sports CEO Dan Sheridan on Friday, noting he can text Abel and hear back quickly.
Abel owns about $185 million in Berkshire stock that he purchased in the open market. His net worth could be close to $1 billion, given his sale of a 1% stake in Berkshire Hathaway Energy in 2022 back to Berkshire -- for about $870 million. He was paid $21 million last year, nearly all of it in cash. Under Buffett, Berkshire hasn't given stock compensation because he sees every share as precious.
Buffett's stake of 14% -- 30% voting due to his ownership of super voting A shares -- is worth over $160 billion.
One issue for the stock is that it may no longer sell itself without Buffett at the helm.
Many individual investors own it because they want to entrust their money to him.
One thing that is unlikely is a corporate break-up. Buffett opposes it and his three children, who will control his stock after his death through a foundation, probably will follow their father's wishes.
Berkshire board member Chris Davis has said the board's real job will come after Buffett departs, when investors will be more bold about making suggestions about what Berkshire should do. The board's role he said will be to protect Berkshire's distinctive culture and insulate management from outside noise.
Berkshire does do some things differently than many companies. For example, it has no investor relations department, doesn't hold quarterly earnings conference calls, and provides limited financial disclosure on many of its divisions, including auto insurer Geico.
CFRA analyst Cathy Seifert has argued that some of these practices may need to change after Buffett. Institutional investors, who may constitute a bigger chunk of Berkshire investors after Buffett, are more demanding.
It might be good to hear Abel go over quarterly results in a conference call. He showed his command of the company at the annual meeting.
As it stands now, investors can engage with management once a year at the annual meeting. This year, many of the questions came from teenagers in the audience that were of limited interest to most investors. This practice may not cut it anymore. It's unclear also what Buffett's role will be at future annual meetings.
Buffett told the crowd of shareholders that change is inevitable.
Berkshire has had remarkable stability -- and success -- over 60 years, but change is ahead in the coming years.
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