Buffett Hunts Abroad With $6 Billion Wager on Japanese Firms

(Bloomberg) -- Warren Buffett, with more than $146 billion of cash on hand, has been struggling to find attractively priced assets at home in the U.S. Now, he’s looking abroad.

The announcement late Sunday by Buffett’s Berkshire Hathaway Inc. that it bought stakes in five of Japan’s biggest trading companies marks one of his largest-ever forays into Asia’s second-largest economy. The wagers show that Berkshire’s chief executive officer, who turned 90 over the weekend, is willing to expand the company’s horizons in his search for ways to supercharge the Omaha, Nebraska-based conglomerate’s growth.

“I think this is a definite signal that Berkshire is more likely to examine and pursue potential investments internationally,” David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business, said. “This could be the beginning of the tip of an iceberg. There could be many more investments such as this.”

The investments into commodity-centric Japanese conglomerates known as “sogo shosha,” disclosed in a statement from Berkshire, underscore Buffett’s willingness to bet on economically sensitive companies despite the pandemic. The five Japanese companies also have interests in businesses ranging from home-shopping networks to convenience-store chains, offering Berkshire exposure to a wide swath of the Japanese economy.

Read more: Buffett’s Bet Paves Way for Japan as a Global Value Trade

Berkshire said it acquired stakes of about 5% in Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co. and Sumitomo Corp. over the past 12 months. Shares of all five companies jumped at least 4% in Tokyo trading on Monday and Japan’s benchmark Topix index rose as much as 1.9%.

Buffett has been seeking ways to deploy his record cash pile into higher-returning assets to fuel the growth at Berkshire that’s made him famous. But he’s been stifled by high valuations for acquisitions in recent years.

Berkshire Hathaway has continued to rake in funds faster than Buffett can deploy them, a high-class problem that’s been a drag on the stock price. The conglomerate’s shares underperformed the S&P 500 index over the past decade.

While the bets are valued at more than $6 billion, they represent just a sliver, about 4%, of Berkshire’s total cash pile. But the wagers underscore that Buffett sees value in Japanese stocks, according to Kass. Berkshire’s investment comes as global investors have pulled $43 billion from Japanese stocks this year in favor of high-flying U.S. technology shares and other companies viewed as more resilient to economic turmoil.

The investments also give Berkshire more exposure to commodities. Berkshire Hathaway has recently been adding to that bet with deals including a $4 billion agreement to purchase most of Dominion Energy Inc.’s natural gas pipeline and storage assets in July.

Valuations in the sector have cheapened relative to the broader stock market in recent years, weighed down by falling commodities prices and investors’ preference for growth stocks like Amazon.com Inc. Most of the Japanese companies targeted by Berkshire trade at less than book value and offer higher dividend yields than the Topix.

“These trading companies generate strong cash flow, they pay out a lot of dividends and they have businesses that can’t be easily replicated,” said Thanh Ha Pham, an analyst at Jefferies Japan Ltd.

That high barrier to entry is key to Buffett’s investing philosophy. He’s long favored companies that have moats, or some superiority to competitors that makes it hard for others to gain traction. Sumitomo, in describing the business model for the sogo shosha, said it’s a business that’s hard to build overnight, making it challenging for new entrants.

Buffett’s wager could help bolster sentiment toward both commodity plays and Japan. The $5 trillion economy is not only grappling with a persistent coronavirus outbreak and the postponement of the Tokyo Olympics, it’s also going through a leadership transition after Prime Minister Shinzo Abe announced his resignation for health reasons last week. Before its rally on Monday, the Topix had dropped for three straight days and underperformed regional peers in 2020.

“I am delighted to have Berkshire Hathaway participate in the future of Japan,” Buffett said in the statement. “The five major trading companies have many joint ventures throughout the world and are likely to have more of these partnerships. I hope that in the future there may be opportunities of mutual benefit.”

Buffett visited Japan after its 2011 tsunami and nuclear disaster, but he has stayed mostly quiet on investments in the country until now. Speculation that he might be eyeing Japanese stocks has been swirling since September 2019, when Berkshire completed the biggest-ever yen-denominated bond sale by a non-Japanese borrower.

Japan’s trading houses have roots dating back hundreds of years. They supply the resource-poor nation with everything from natural gas to noodles, and have spent the last few decades transforming into conglomerates that hold equity stakes in hundreds of companies around the world. While they’ve diversified into areas such as textiles and machinery, they still derive much of their revenue from energy, metals and other commodities.

Berkshire said it plans to hold the Japan investments for the long term and has pledged to only own as much as 9.9% of the shares in any of the five companies, unless given specific approval by the firm’s board of directors.

“It’s bright news for not only the company but also Japan’s stock market,” an Itochu spokesman said. Mitsubishi said it has been contacted by Berkshire but isn’t able to provide further details. Sumitomo said it will engage in dialogue.

The investments represent a notable push abroad by Berkshire, which has long had its biggest holdings in U.S. companies including Apple Inc. and Coca-Cola Co. Buffett said in 2018 there was a good number of countries he’d be willing to invest in, although foreign firms didn’t turn to Berkshire for funding as quickly as U.S. companies might. Berkshire’s offshore wagers include China’s BYD Co. and Brazilian payment company StoneCo Ltd.

This isn’t the first time Buffett has invested in multiple competitors from one sector. Berkshire took stakes in four major U.S. airlines in 2016, though it ended up selling in 2020 as the pandemic brought most air travel to a halt. The company, which has a stock portfolio valued at about $207 billion at the end of June, is also a major investor in several U.S. banks.

©2020 Bloomberg L.P.