Berkshire Hathaway Taps Japanese Corporate Bond Market’s Appetite for Yield

Berkshire Hathaway (NYSE: BRK), based in Omaha, Nebraska, United States, is an American multinational conglomerate holding company for a vast number of businesses and an investment powerhouse.

Berkshire Hathaway

The company has evolved from its humble beginnings to having around 60 operating companies under its umbrella that deliver sales and profits while it holds significant positions in global giants like:

  • Apple Inc. (NASDAQ: AAPL)
  • Coca-Cola Company (NYSE: KO)
  • American Express Company (NYSE: AXP)

Berkshire Hathaway has an enormous amount of cash reserves as well; the latest figures stand at over $ 100 billion.

Some of the subsidiaries owned by the company comprise:

  • GEICO
  • Dairy Queen
  • Benjamin Moore Paints
  • NetJets
  • Duracell
  • Fruit of the Loom

Berkshire Hathaway has a market capitalisation of $ 517 billion and a P/E ratio of 17.76. Investors wishing to take grab share of the Berkshire pie have two options, Class A stock (NYSE: BRK-A) and the lower-priced, more common Class B stock (NYSE: BRK-B). As of 11 September 2019, the BRK-A stock is priced at an astounding value of $ 316,230, edging up 1.3% ($ 4,279) at the close of trading on 11 September 2019. Meanwhile, the BRK-B is currently priced at $ 210.91, also climbing up 1.25% ($ 2.60) at the end of trading on 11 September 2019. Class B shares not only are more accessible to retail investors, they offer the benefit of flexibility in times of the need for liquid money.

The stocks that Berkshire buys and sells get large attention of the investors worldwide, who naturally like to analyse the stock portfolio to gain clues to develop a Buffett style portfolio and his take on the market stocks.

The Oracle of Omaha and His Astute Investments

“Oracle of Omaha”, Warren Buffett (Image Source: google)

One of the most successful investors of all times, known as the “Oracle of Omaha”, Warren Buffett is the CEO of Berkshire Hathaway and became the largest shareholder within two years of acquiring his initial stake in the company in 1960s.

During the financial crisis of 2008, Berkshire Hathaway under Warren Buffet’s leadership, placed its bet on Goldman Sachs, investing ~ $5 billion due to the urgent need for Goldman to raise immediate capital in the early days of the catastrophe.

What happened to the investment? Well, the shares were redeemed by Goldman Sachs in 2011. During the three years of keeping the stock, Berkshire Hathaway earned around $ 3.7 billion which included $ 1.27 billion worth of dividend payments received.

Also, at the time of the deal, the “superinvestor” was also granted warrants to buy $ 5 billion of Goldman Sachs common stock at $ 115 each. Subsequently, in 2013, Mr Buffett received $ 2 billion in cash along with 13.1 million shares of Goldman Sachs stock upon exercising the warrants.

This investment is only one out of the many examples of Buffet’s long-time investing strategies and how his steely-eyed decision to stand by Goldman Sachs clearly paid off. Some of the most lucrative deals struck by Buffett involved finding companies temporarily strapped for cash and injecting them with the emergency capital.

Berkshire Hathaway Visits the Japanese Market

Another recent example of his long-term strategic initiative is the large-scale activity in the Japanese Corporate Bond market, that experienced a historic day on 6 September 2019, as Berkshire Hathaway along with a group of domestic and international companies issued around JPY 1.7 trillion ($ 16 billion) of debt in Tokyo.

On Friday, 6 September, the 10-year Japanese government bond yield was a negative 0.24%, marking three years since Japanese have lived under the Bank of Japan’s negative interest rate policy.

At the backdrop of the fall in Japan’s benchmark government bond yield beyond the Bank of Japan’s preferred range, banks, insurers, asset managers and other investors flocked to Berkshire’s offering, paving way for other multinationals to raise capital in Japan’s bond market, where there has been a narrow line of domestic and foreign issuers of yen-denominated bonds.

Moreover, the global market uncertainty has pushed down the yields of many government bonds worldwide including debt of the United States, Germany etc, increasing the appetite for yield globally.

During the day’s trade, Berkshire priced the JPY 430 billion ($ 4 billion) six-part bond with maturities of five, seven, 10, 15, 20 and 30 years, ranging in size from JPY 19 billion to JPY 147 billion and coupons ranged from 0.17 -1.1%, as per Bloomberg’s reports. Berkshire tapped into the Japan’s hunger for yields helping investors to put their surplus capital to work and diversify into highly rated debt.

At the home front in Japan, tech investor SoftBank Group led the bond sales including JPY 400-billion worth of notes to individuals and a further JPY 100 billion for institutions. Other companies participating in the glut of issuance included property Group Mitsui Fudosan, Nippon Steel etc.

Buying bonds with negative yields is a peculiar scenario whereby the investors agree to pay the governments to keep their money safe, especially in times of a bleak economic outlook. Particularly in 2019, around 29% of the global government bonds are trading with a negative yield, which is the highest proportion recorded since late 2016. Thus, at a time when negative or no yield is being offered, investors worldwide are venturing out into risky areas of the financial markets.

To prevent a worldwide economic doom, central banks are resorting to introducing vast asset purchase schemes resulting in negative bond yields. Besides, with the ongoing US-China trade conflict fuelling the market volatility, central banks are increasingly opting for effective liquidity measures to try to prevent a recession scenario. Going forth, investors may need to keep a close watch as the challenges presented by global negative bond yields are expected to escalate.

(Note: $ – in USD) 


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