Episode 44 | Buffett Steps Down: What’s Next for Berkshire Hathaway?

In Episode 44 of “Market News with Rodney Lake,” Professor Lake, Director of the GW Investment Institute, discusses the transition at Berkshire Hathaway following Warren Buffett’s announcement that he will step down as CEO by the end of 2025. The episode highlights Buffett’s long-standing philosophy of capital reinvestment and buybacks over dividends, and how the upcoming leadership shift to Greg Abel may alter that direction. Professor Lake emphasizes the improved performance at Geico under Todd Combs and Ajit Jain, showcasing a possible preview of Berkshire’s future operating model. As Berkshire enters a new era, investors are encouraged to closely monitor how Abel and other leadership manage capital allocation, particularly in light of the $300+ billion cash reserve and evolving shareholder expectations.

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the Director of the GW Investment Institute. Let's get started. Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake. Welcome from the GW School of Business, Duquès Hall studio.
Thanks, everybody for tuning back in. If you're coming back and anybody new, thanks for tuning in on YouTube, Spotify, Apple, Amazon, wherever you're listening to this, for the podcast world. Today, special day: Berkshire Hathaway just had their annual meeting. So we're going to go over the company. We're going to go over a few points from the annual meeting.
Why is this important? Well, part of this annual meeting, it was announced. Or, you know, Buffett announced that he's going to recommend that he steps down as CEO. We're going to jump into that. But let's talk about Berkshire for a moment as a business. So Berkshire is one of the portfolio holdings of the GW Investment Institute.
Remember, this is for entertainment and, you know, educational purposes only. So, this is the GW Investment Institute framework where we're going to overview the business, the management, the price valuation and the balance sheet. We're going to talk about the annual meeting as well. We're going to talk about the future of this company, because likely it's going to be very different, or at least somewhat different from where we are now with Warren Buffett as CEO.
And again, we're going to get into that when we get into the management section. So Berkshire is an enormous company, and we're going to get into the annual meeting. It is one of the non, you know, one of the very few non-tech companies that's over $1 trillion, in the market cap. So let's just tackle some of the stats.
So when we talk about Berkshire it is a multi diversified company. It has, you know, holdings in a variety of different areas. Railroads, insurance, obviously has a big portfolio. Apple being the largest single holding there. Even after they sold shares. So it's in a variety of different businesses and it has long term holds in companies like Coca-Cola.
Which is another portfolio company for the GW Investment Institute’s portfolios. As an example, as well as American Express. So let's talk about where they are right now. So when you look at the market cap, you know, you're talking about a company that's $1.1 trillion. This is as of early May just after the annual meeting in Omaha, Nebraska.
So again, this is an enormous company. One of the things that we'll talk about here on the management side is they have not paid dividends. So when you talk about, okay, well, what's the dividend, strategy for this company, for management, there is no dividend. The idea there was that Buffett each year, you know, would be able to figure out ways to to reinvest that capital.
And that's a more efficient way to do it. And also, you know, when there was an opportunity they could also buyback shares. And so they talked around about 1.2 times. Book. Right now it's trading at almost 1.7 times book. So there hasn't been any share buybacks. Recently we'll talk about that when we talk about the balance sheet.
The cash has been piling up. And that's a concern for many investors who are thinking, well, you know, maybe you should pay dividends then if you can't find places for this, if they're not acting quite as quickly as they have in the past, you know, we'll see. But now there's going to be certainly a change in the guard there.
So let's jump in. You know, a little bit further on the business. So on the operations side, obviously insurance piece here is a big part of that. And at the annual meeting we’ll lace in some of the annual meeting as we talk here. You had Ajit Jain, who is the head of the insurance, part of that business.
And one of the things that I would like to highlight from the annual meeting that's tied to the business section of Berkshire Hathaway is Geico. Geico was having some trouble, you know, finding its footing in, you know, talked about this at the annual meeting that at various times along the way. Geico has, you know, lost its way and different, you know, you know, scenarios, and Buffett talks all the way back to, you know, the opportune time that he had where he was in New York and he took the train down to DC.
Knocked on the door, was able to get in and to really, you know, talk to someone at Geico and really understand that business. And so, you know, obviously it's, it's a long term hold for them. They bought part of the company 50%, and then the rest of the company, later on, this is a this is a very important business for Berkshire Hathaway.
And it's a it's a, I think a clear window into sort of what, maybe the new Berkshire would look like. And so Todd Combs, who was one of the portfolio managers that was added along with Ted Wester a few years ago, to help manage the stocks in the portfolio companies for Berkshire Hathaway on the investment side was put in charge of this operation.
They had 50,000 people. He cut that by 20,000. That's a huge number. So they're getting efficiencies and Ajit Jain, during the meeting is saying that they're getting a combined ratio, which just shows the efficiency, for the business. Anything over one is that it's not profitable and anything under one is profitable. And so there they had they said they had an eight in front of that number.
And so that that would be outstanding. And he had mentioned, Ajit Jain, that that's the maybe the first time ever I can't remember the exact words I'm paraphrasing there. But certainly that's something that's significant when you talk about the turnaround in that operations. And it sounds like in his also paraphrasing in his words, that they had work to do, on the, you know, the AI piece of the equation of what other companies are doing.
And you can think of a company like Tesla that offers their own insurance on their vehicles, that's getting real time data from their vehicles. And also getting something called a safety score that's in beta version. And so I would say that it's unlikely that Geico's in the same place because they don't have the same technology deployed.
And they certainly don't have their own vehicles. But Ajit Jain is saying that they have made great progress with Todd Combs, at the helm of this business, and they're going to continue to, and I think that's a good testament to the culture at Berkshire to eliminate bureaucracy. Buffett was was asked about, you know, his feelings on DOGE, and he said, why don't you ask me a tough question now, Becky, quick, ask this question.
I obviously being a little facetious there, but effectively, you know, he didn't, you know, wasn't, strongly worded but essentially said that, you know, there is no check on government spending and effectively said that someone has to do this, to try to rein in the deficit deficit spending is not healthy, for the country, not healthy, for the currency of a country and specifically, obviously for the US.
And so bureaucracy in all of its forms, including inside the company, not good. And they talked about eliminating that at Geico. And that's a good thing. And Todd Combs, you know, gets a lot of credit. Again, this is from Ajit Jain. But they're certainly had have made big progress in that business. And so I think that is a you know, maybe a window into the way that Berkshire is going to be run without Buffer.
So let's jump now into management will probably come back to business. Possible. But let's now talk about management. And again, we're, we're interlacing the annual meeting along with the company here, for this episode because it's so recent off the Berkshire Hathaway meeting. You know, people talk about this is the Woodstock for capitalists. They like to go out there.
And I would like to also thank Steve Ross, who's an advisory board member for the GW Investment Institute, who always shares his notes. And so thank you, Steve, for sharing those notes. Very much appreciated. And, you know, certainly your take on this, meeting is always important. Thank you. So one of the things, you know, from the meeting that came as a surprise, I think specifically in the timeline, but not at not in, let's say in the macro sense, in the micro sense, in the macro sense, Buffet's 94 years old.
Charlie Munger unfortunately passed away, you know, recently. So he was 99. Buffett's 94. Not a shocker that at some point soon Buffett's probably going to move on. But many people didn't expect at this specific meeting that he would make this announcement. But he made this announcement by the end of the year. He's recommending that Greg Abel succeed him as CEO.
That has now been made the case. And so after the meeting, that that came out that that, will in fact happen, Buffett will move to chairman, as part of this transition, and Greg Abel will become the CEO on January 1st, 2026. And so that is a big change. And again, in the grand scheme of things, when you think about, you know, Berkshire Hathaway and you think about Buffett, that's not a total surprise.
At 94 years old, you're expecting at some point, there's going to be a transition here. But again, at the meeting that came a bit of a surprise for everyone. So now as investors, you really have to start thinking about, okay, Greg Abel, Ajit Jain, Todd Combs, Ted Weschler, is this the crew, that, you know, you want to, you know, keep your dollars invested with that Berkshire.
And I would say in the short term, again, not investment advice. So far it is. And now these are the things you have to figure out. I think the story about, you know, what happened at Geico is also important to understand and to see. Okay. Well, what's this next group? That's already been working there, by the way.
And how are they going to manage, moving forward. And it looks like they're, you know, doing an excellent job if you use that as one example. And Greg Abel certainly has been an operator. Now, is Greg Abel going to be the same type of CEO as Buffett? Seems very unlikely. Buffett's very unique individual. He gave credit to Tim Cook at the meeting.
As the only person who could have taken Apple, from where it was, to where it is now, and gave credit to Steve Jobs as being the singular person that could get Apple, to where it was, before he passed away. And so certainly it seems like he's giving maybe that was sort of a, a parallel story that he was providing to talk about, you know, maybe he's he's trying to give confidence, from for everyone, for Greg Abel, that he can do something similar to what that transition look like from Steve Jobs, to Tim Cook.
And, you know, you know, maybe, and so possibly Greg Abel will will be a very different type of CEO, than, than Buffett, but could be very effective. And so part of the, let's use this example. If you rewind history and unfortunately, Steve Jobs passed away early, and Tim Cook take took over and many people thought, okay, that's it for Apple.
Apple is you know, it was a great it was a great run. Steve Jobs was a visionary. There is no one that can really replace Steve Jobs. And that is true very likely. However, what was missed, especially at the time, is that, you know, you didn't have to have the next Steve Jobs. You needed the next Tim Cook, to run the company to make it more efficient, to, to increase the profitability to, for the company to expand the services, that they were offering, that person, Tim Cook, did a fantastic job.
And so it doesn't mean that, you know, Greg Abel have used that as an analogy. It doesn't mean that Greg Abel is going to succeed in the same ways that Buffett does, but it doesn't necessarily mean that that is not the only path for success. And so if you certainly look at what was built up over time, and Apple by Steve Jobs and you look at what's happening, now with Tim Cook or has happened, you know, you certainly can think of scenarios where Greg Abel can take what has been built, by Buffett and company, and take that to the next level.
Now, what does that mean? Now, this is the open question, and this is what we all as analysts have to figure out. So we own shares at the GW student investment funds as part of the Investment Institute. And many people own shares of Berkshire Hathaway. And you know, many people go out to the do the annual meeting in Omaha for that very reason to hear to hear directly from from Warren Buffett during the Q&A session here.
So how do we do that? Well, obviously, we have to start paying close attention to the decisions, that Greg Abel is making, the type of capital allocation decisions. You know, one of the big things that people are going to be watching closely is, is Berkshire Hathaway going to change their dividend policy? So they've been piling up cash now over 300 billion in cash.
And that's that's more than most of the tech companies that have on their balance sheet. And for certainly like, you know, if you include the Mag 7, it's close to, you know, more than what they all have combined on their balance sheet at the moment. So it's a very significant number. And so what do you do with all that cash?
Certainly there's going to be acquisitions, and certainly investments. When you talk about, you know, Greg Abel was involved in, in the five trading companies, that they deployed capital and, and Japan and so far that has worked, in the way that they finance that has worked and has been clever. So those are great things.
And they and they're increasing, the stakes in those companies. But, you know, when you talk about 300 billion that you have to deploy, you're really what about the talks about the you know, it's the, elephant hunting. These are have to be big deals to deploy that parts of capital. Now you can buy back shares, but when you're trading at one point almost seven times book value, and you're saying we're going to buy back shares at 1.2 times, the cash will continue to pile up.
And so obviously, dividends, might make sense at some point. And we'll have to see Greg Abel is going to be his own CEO. We'll see what happens there. You know, you know, Tim Cook and Apple, they pay a dividend. You know, many people thought, okay, these big tech companies weren't paid, ever paid dividends. And they certainly do.
Now Microsoft in and Apple does. Not you know, they're not the Procter and Gamble of the world. But they're certainly paying significant dividends. Back to shareholders. And Apple is a big, share purchaser as well. So maybe and again, maybe they'll change that price where they feel comfortable buying back shares. So maybe it's, you know, not 1.7 times and it's not 1.2 times, but maybe it's 1.3 times what we're willing to buy back shares with all this cash.
And so that could also be adjusted. So that's so but again we're going to have to watch closely the management. Super important. Ajit Jain is still there running the insurance business and has been very successful. We gave the Todd Combs story with what's happening at Geico. That's obviously one of the most publicly facing parts of Berkshire Hathaway that people know.
Lots of advertising for Geico, that people follow. And many people have, the, the insurance as well. So, on that side, I think it's super important, to really pay close attention to that transition, you know, what's going to be happening in the next few months? What's Buffett going to say? What's Greg Abel going to say?
What type of acquisitions, what kind of capital allocation deployments they can do? Remember on the capital allocation you grow either through investing in the business and, getting new products and services to market, in the company directly organic or the inorganic, the mergers and acquisitions, which obviously, Buffett and Berkshire has been famous of. You can also, they have another lever.
They can deploy capital by buying pieces of companies like Apple as an example, and Coca-Cola, very famously, long term holding at Berkshire Hathaway. So that's another way to do it for them that other other companies don't necessarily do it that way. Dividends, which they don't do share buybacks but they do. Or reducing debt, which is not really, something they need to do given that they're piling up all this cash.
And so, so it's going to, you know, be important for us to pay attention as analysts. What's going to happen, with the capital allocation, decision there. Next up, we're going to talk about the valuation here, the price valuation. And we've already talked about this effectively. The way to look at this company is more on the book value, because, you know, the types of businesses that it own, especially around, the insurance business, the energy business, you know, book value is probably a better, you know, way to, to understand this business.
And so right now they're trading again, this is just after the annual meeting, in May in 2025, you're trading at 1.7 times book. So historically this is pretty high. Again, or at least on the high side. And they had talked about Buffett. You know, talking about buying back shares at 1.2 times. Not really going to do that here.
Near 1.7 times is not something that that is going to be, you know, a time to buy back shares. And so there is, you know, questions about what's going to happen in this transition. And I think that likely is going to impact, you know what? What's the share price here? And what's the what's the market cap from here.
And so we'll have to really, pay close attention. But on the valuation side, at 1.7 nearly times book value, it's not something that we should spend too much time thinking about in the short term. I think we need to definitely pay close attention to what's happening, with Greg Abel and company. Are are they planning to buy back shares?
Are they planning at a different level? Is it maybe 1.3 times book or 1.35 times book? I'm speculating. Complete speculation there. Maybe it's going to remain the same. Likely not go lower than that. And the other big thing is will they pay dividends? This is an open question that many people have asked. And so that's something that we need to pay close attention to.
Next up here let's talk about the balance sheet. We already talked a little bit about that. You know 300 billion plus on the on the balance sheet. Much more than and many of the tech companies that are out there, and some you know, you combine some of those, it's still more. So this is really a lot of cash.
And how productive is that cash? You know, obviously the interest rates are a little bit higher right now. So you're getting a little bit more for that. But really that's not the design here. The design here is to deploy that capital to get that out there, to buy businesses, to help grow this company, to invest in other publicly traded companies.
And really, until we see some movement on that, you know, that has been a significant challenge, at scale for Berkshire, you know, again, $1.1 trillion market cap, 300 billion in cash, really, plus really having a challenging time, to deploy that. So balance sheet though, you know, obviously we're ranking that super high, a ten.
So let's, let's now go through the framework here, you know, one at a time. Again, just to kind of make sure we, we touch on everything and get all the scores. And so when you talk about the business, this is a diversified conglomerate has a bunch of strong brands. And obviously you know the brand being one of the big brands being their CEO.
As an example. But you know, these are good returns on equity here, you know, the 10 to 12% here. But now you would call that average, but the strong, you know, really like allocation of capital is something that you want to focus on here. So, you know, on the business side, we probably give them, you know, maybe, in eight or between the seven and eight, you know, something like that.
Hard to give a nine or a ten on the business side, you know, but you could probably say somewhere between the seven and eight on management. When you talk about now, this makes it a little bit more challenging. You're talking about an 8 or 9, given that there's some transition time here that we're going to have to think about, certainly you can give Buffett a 9 or 10.
No, no issues there. But this is a transition time. Greg Abel is going to be taking over, has done a very effective job already. And a gain as well. So but let's say an eight or a nine there on the price valuation. But it's been high, right. It's not super overpriced or anything, but it's on the high end.
So you kind of seven maybe they're in the balance sheet, probably a ten. So, you know, your weighted score still comes out to like, you know, let's say a 7 or 8, depending on how, how we really weight those things and how low we go. So you're seven and a half or something like that. And really the weight on that score is this transition in the management team.
And the fact that they've piled up so much cash and they're not deploying it as a concern around the management side of that right now. The balance sheet, that's a very healthy balance sheet. And you're not worried about that. But the valuation is elevated. The capital allocation is an open question. And then the transition on the management side and again, the businesses are not high fliers.
These are not, you know, Nvidia with, you know, 70 plus percent gross margins and 55% net margins like a Visa. You know, these are more modest growth businesses at large. Insurance, which is one of the primary businesses, as a reminder, is a commoditized business like Geico. Obviously, you can make money there. But it's not the same type of gross and net margins that you're going to find in the Nvidia in Visa, as an example, or a big tech company like Apple, which they invest in.
But overall, you know, that's where you're going to end up with a score. So these are all very favorable scores. And again, we've laced in the annual meeting and the big announcement that there is going to be a transition from Warren Buffett to Greg Abel at the end of this year. Greg Abel will take over January 1st, 2026.
We're all going to be paying close attention to what's happening, where shareholders at the Investment Institute, we're going to be having our analyst, look at this. We wrapped up for this semester as an example. So for the fall, this is one of the things that will be kicking off with and making sure, that we're tackling this and trying to understand, you know, what's the new management team look like?
How are they going to be different than Buffett and company, and are we optimistic about them? Do we have confidence in them, or should we do something different, with our shares? So that is a wrap for this episode. Thank you for tuning in, and we look forward to seeing you on the next episode of Market News with Rodney Lake.
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