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A lot of people think dividend investing has made Warren Buffett rich. They’re wrong – it’s growth stocks that have taken the Oracle of Omaha’s net worth to over $115bn.
In fact, I believe Berkshire Hathaway (NYSE:BRK.B) is one of the best growth stocks to buy now. It’s one of the largest investments in my Stocks and Shares ISA and I’m planning on adding to it in the near future.
What are growth stocks?
Put simply, businesses have two choices about what to do with the cash they generate. They can either pay it out to investors, or they can reinvest it to try and make more money in future.
Shares in companies that mostly distribute their cash to investors are dividend stocks. By contrast, growth stocks are shares in companies that mostly reinvest to increase their future earnings.
Reinvestment can happen in various ways. Companies can buy equipment to boost revenues, pay off debt to increase margins, repurchase stock to reduce their share count, or acquire other businesses.
The aim with growth investing is to make shares worth more than their present value. This comes by having the amount of cash per share the company generates go up over time.
Berkshire Hathaway
Berkshire Hathaway is a growth stock. The company is relentlessly focused on looking for opportunities to increase its earnings it has reinvested its cash in several ways over the last year.
It has acquired a business (Alleghany), made various stock investments, and bought back a number of its own shares. What it hasn’t done is pay a dividend – it is unwavering in its focus on growth.
Buffett said in his recent letter to shareholders that his investments in American Express and Coca-Cola have done well because they have grown. This is why their value has increased.
In a CNBC interview, Buffett stated that the key to this is retaining earnings and investing them in ways that increase future cash generation. And this is what Berkshire aims to do.
A growth stock to buy
In my view, Berkshire Hathaway is one of the best growth stocks to buy right now. The company’s 10% average annual growth over the last decade is exceptional for a conservatively-run business.
Investing is never entirely safe, though, and that includes Berkshire. One of the biggest headwinds Buffett identifies is that the company’s size makes it difficult to maintain its historic growth rates.
I don’t dispute this – who am I to argue with Buffett on the subject of Berkshire?! – but I think there are still avenues for growth ahead. Most notably, the company’s utilities business looks promising.
The shift to renewable energy will need massive infrastructure investments. And I’m expecting the opportunities here for Berkshire Hathaway Energy to support strong overall growth in the company.
Valuation
A lot of people don’t see Berkshire Hathaway as a growth stock. That’s largely because it doesn’t trade at the same multiples as shares in Amazon, Microsoft, or Tesla.
But Berkshire does exactly what growth stocks are supposed to do – it retains earnings and reinvests them as profitably as it can. The fact that it has a lower price tag just makes it more attractive to me.