The poaching of some Berkshire Hathawayfor yourself is a savvy strategy for most investors. But did you know that Warren Buffett and his team can’t just buy a stake in any outfit they like? Between a portfolio of stocks worth over $300 billion and a slew of other private companies of roughly the same value, some publicly traded companies are too small for Berkshire to care about; there are also the regulatory hassles of owning more than 5% of the shares of a particular company.
That doesn’t mean the Buffett-led conglomerate wouldn’t have bought up some small names before Berkshire became a giant, though. One of the tickers he most likely would have picked up before becoming a multi-billionaire is the insurer National Lincoln Society (NYSE: LNC). Here’s why.
4 for 4
When it comes to life insurers and pension plan providers, Lincoln National isn’t exactly a top name. The $8 billion company serves 17 million customers and turned $19.2 billion in revenue into a net profit of $1.4 billion last year. This year’s top and bottom lines follow a similar rhythm, which is respectable but hardly breathtaking.
Don’t be fooled by its relatively small size. Lincoln National sports many of the attributes that Buffett values in an investment.
One of those attributes is that it’s financial value — an insurance company.
Although the bulk of the financial stocks found in Berkshire Hathaway’s portfolio come from the banking sector, the fund does more than just hold publicly traded stocks. Auto insurer Geico, United States Liability Insurance Group, biBERK Business Insurance and Gateway Underwriters Agency are among the non-public insurance holdings brought to the Berkshire family since its launch as we know it in 1965. As Buffett puts it, “ invest in what you know.” He clearly knows insurance companies, but more than that, he clearly loves them since he still owns so many!
And it’s not hard to see why the Oracle of Omaha likes the business: it generates relatively predictable cash flow.
That’s the second reason Buffett would be a Lincoln fan now, if Berkshire were a (much) smaller pool of funds. While cash flow from Geico and biBerk goes directly into Berkshire’s bottom line, for publicly traded insurers like Lincoln, it comes in the form of dividends. Lincoln has a long history of earnings per share that more often than not exceed the company’s dividend payout per share. Just be prepared for the sometimes alarming quarterly loss if you decide to take the plunge.
The third reason why Warren Buffett probably would have been a fan of the Lincoln National Corporation at another time relates to the second reason: the dividend and the resulting dividend yield. At its current rate of payout, the stock’s dividend yield is close to 4%. Also note that the insurer has managed to increase its payout per share every year since 2010, shortly after the economy began to recover from the subprime mortgage meltdown. It’s an impressive track record made all the more impressive by the fact that Lincoln would almost be called a dividend aristocrat if it weren’t for that relatively short period that shook up every facet of the global economy.
Finally, there’s no denying that with the stock price less than 10 times past 12-month earnings and less than five times next year’s forecast earnings, Lincoln National is ticking Buffett’s “value” box. .
You should do what Buffett can’t
No, he’s not using new technologies in a smart way, or working on a breakthrough cancer treatment. Lincoln National sells insurance, and… well, insurance is pretty boring.
That’s largely the point, though. Buffett isn’t looking for stocks for entertainment or as a hobby. He looks for businesses that will never go stale and businesses that are expected to be just as successful in 10, 20, or even 30 years from now as they are now. Financial catastrophe protection is one of those businesses, and this is one of those businesses.
Buffett cannot add Lincoln to Berkshire Hathaway’s holdings. Unless you’re a multi-billionaire yourself, you can get into this healthy, overlooked business without worrying about how much or how much you can own.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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