Berkshire Skips Apple Bonds as Buffett Says Not at Those Yields

Berkshire Skips Apple Bonds as Buffett Says Not at Those Yields

Warren Buffett, the billionaire chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said he isn’t investing in corporate debt, including Apple Inc. (AAPL)’s record offering, because yields are too low. “We’re not buying corporate bonds of any kind now,” Buffett, 82, said May 4 during an interview with Bloomberg Television’s Betty Liu in Omaha, Nebraska, where Berkshire held its annual meeting. “Not at those yields.” Berkshire held $12.2 billion of corporate bonds as of March 31, according to a quarterly filing issued on May 3. That’s down 14 percent from two years earlier. The value of Berkshire’s equity portfolio climbed 54 percent to $97.2 billion in the two years ended March 31 as markets rallied and Buffett added shares of International Business Machines Corp. Yields on debt from corporate securities to Treasuries have tumbled as the Federal Reserve slashed interest rates and bought bonds to help the economy recover from recession. The payout rate on dollar-denominated company debt fell to a record 3.35 percent on May 2, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index. Yields have averaged 5.87 percent during the past decade.

Apple, maker of the iPhone, sold $17 billion of bonds on April 30 in the biggest corporate offering on record. Buffett, who has said he limited investing in technology companies in part because he doesn’t understand them, said the decision to abstain from the Apple offering was part of a broader strategy.

‘Too Low’

“We’re not buying bonds of Apple — we’re not buying bonds of anybody,” Buffett said on May 4. “It has nothing to do with them being a tech company. The yields are too low.”

Apple’s debt sale included $4 billion of 1 percent, 5-year notes that pay 40 basis points, or 0.4 percentage point, more than similar-maturity Treasuries; $5.5 billion of 2.4 percent, 10-year securities with a relative yield of 75 basis points and $3 billion of 3.85 percent, 30-year bonds paying an extra 100 points, data compiled by Bloomberg show.

Investors have flocked to bonds since the 2008 financial crisis, when the Standard & Poor’s 500 Index of stocks fell about 38 percent in a year.

Corporate and municipal bonds “were ridiculously cheap relative to U.S. Treasuries (USGG10YR)” in early 2009, Buffett said in an annual letter to investors in February 2010. “Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.”

‘Brutal’ Problem

The Fed has held its target interest rate for overnight loans among banks between zero and 0.25 percent since December 2008 and is buying $85 billion of bonds a month. Buffett said on May 4 during a question-and-answer session at the annual meeting that he pities people who have “clung to fixed-dollar investments.”

“The problem faced by people who have stayed in cash or cash equivalents or short-term Treasuries, it is brutal,” Buffett said. “I don’t know what I would do if I were in that position.”

Buffett will collect a 9 percent dividend on the $8 billion preferred stake Berkshire gets as part of a deal he struck in February with 3G Capital to take ketchup-maker HJ Heinz Co. (HNZ) private. Heinz is rated BBB+ by Standard and Poor’s, the eighth- highest of 10 investment grade levels. Apple has a AA+ grade, the second highest.

Berkshire has been burned by bets on lower rated corporate debt. The cost of impairments was $85 million in the first quarter, compared with $337 million a year earlier, Berkshire said last week. The losses in both periods were related to bonds issued by Texas Competitive Electric Holdings.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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