Fairfax Financial Holdings Ltd. (TSX: FFH) has frequently been called the Berkshire Hathaway of the North, with CEO Prem Watsa playing the role of Warren Buffett. The comparisons have been apt. Both companies use float, premiums collected from insurance companies, to invest in value stocks. Under Prem Watsa, Fairfax has been a successful wealth creator over the years. But is it a good buy at the current price?
At first glance, the company certainly does not seem expensive. It trades at around 10 times earnings and at just over its book value. Its balance sheet is in excellent shape being in a net cash position, having more cash on hand than total debt. Even without its cash, its yearly free cash flow alone is almost enough to pay down the totality of its debt. From a value perspective, this company certainly looks attractive.
Fairfax also returns capital to shareholders through dividend payments. At the current market price, the company pays a dividend of 1.69%. While the dividend is not large, it is certainly secure given the amount of cash on hand and free cash flow the company generates. Unfortunately, Fairfax has not raised the dividend in years, but any dividend is still a positive factor to many investors.
On important factor to consider when investing in the company is that it offers Canadian investors a chance for significant international diversification. The company invests in other hard-to-reach areas of the world, including India and Africa. This makes Fairfax a practical way to gain access to these regions, which are incredibly difficult places in which to invest as an individual investor.
Fairfax’s book value per share increased 4.9% year-over-year as of Q1 2018. Operating income increased 13.8% over the course of the year in large part due to the strong underwriting performance of its insurance business. Overall, the company’s excellent balance sheet and strong performance seem to indicate Fairfax as being a good potential investment.
Fairfax gives investors the opportunity to invest in many parts of the world with a focus on finding undervalued businesses. The company’s dividend is also a bonus, although it would be nice to see it grow over time. Much of the returns the company provides depends on Fairfax’s ability to generate premium from the insurance arm of its business and its ability to effectively invest the premiums.
In general, Fairfax has been effective at investing its capital, leading to share and book value growth over time. But the company has been known to make mistakes, such as its recent large bet on a financial downturn that never materialized and instead ended up being a major bull run. But that experience also shows Prem Watsa’s ability to change his mind, admit his mistake and move on to new things.
With Fairfax you will most likely receive solid, relatively low risk, returns over time. If that appeals to you, then this would be a great stock in which to invest. With an investment in Fairfax, you are essentially handing your money over to Prem Watsa, betting that he will allocate capital more effectively than you would yourself. With at least a portion of your portfolio, that might be a good bet to make.
