Better Buy: Berkshire Hathaway Stock or Brookfield?

Both Berkshire and Brookfield stocks are wonderful businesses, but Brookfield is likely to make you wealthier over the next 20 years.

| More on:
Investor wonders if it's safe to buy stocks now

Source: Getty Images

Berkshire Hathaway (NYSE:BRK.B) stock is an indisputable core holding for the diversified portfolios of many long-term investors. It’s often quoted to have delivered excellent market-beating returns for the long haul.

On the third page of its latest annual report, you would see that its compound annual return from 1965 to 2021 was 20.1%, almost double that of the U.S. market (S&P 500) returns of 10.5% in the period. However, many investors don’t know that much of those gains were earned in the early days when the company was much smaller and each investment Berkshire made, at that time, drove a big impact on the company’s bottom line.

Berkshire’s returns are not as great as they used to be

Surely enough, when we backtest results for the past 20 years, Berkshire Hathaway returned only 9% per year. This is not a bad return versus the S&P 500 benchmark return of just less than 8% in the period. However, as you can see, the 9% return is a far cry from the 20%.

Like Berkshire, Brookfield (TSX:BN) employs a value investing strategy. Like Berkshire, it invests in quality businesses. However, Brookfield is much smaller. After spinning off its asset management business, Brookfield’s enterprise value is about 42% the size of Berkshire’s.

They also manage their businesses differently.

How Berkshire manages its businesses

Berkshire is a holding company and employs a decentralized management model. It has carefully selected and bought whole businesses, while keeping the original management team who has been managing the quality businesses just fine.

For example, Berkshire’s wholly owned businesses include the BNSF Railway and insurance company GEICO. Additionally, it has an electric utility with wind, solar, and transmission assets in the United States. It also owns a diversified investment portfolio, including fixed-income investments in United States. Treasury Bills, U.S. government bonds, foreign government bonds, corporate bonds, and stocks. Furthermore, it toggles the size of its cash position throughout the ever-changing macro environment.

Berkshire can trade its stock holdings without warning. However, it also has stocks like Coca-Cola for which it is a long-term investor. It continues to hold a 9% stake in the company and makes massive returns on its original investment on dividends alone each year, because it was an early investor.

How Brookfield manages its businesses

Brookfield prefers to operate its businesses. It has the operating expertise to optimize assets to improve margins. Its acquired assets may also be considered for its ongoing capital-recycling program. Given the opportunity, it could buy undervalued stocks and take profit at higher valuations later or buy the underlying businesses outright.

For example, through its publicly trading subsidiary Brookfield Infrastructure Partners, Brookfield accumulated enough shares for just under a 20% stake in Inter Pipeline during the 2020 pandemic market crash before buying the entire business outright in 2021.

According to Factset Research Systems’s data, in the past two decades, Brookfield stock returned about 15.7% annually, which was 74% better than Berkshire stock. In this period, it also made a number of spinoffs or mergers, including spinning off its infrastructure, renewable, reinsurance, and asset management businesses. It also spun off and merged again with its properties business that largely comprised of trophy assets in retail and office properties. The market simply didn’t see the value it did.

Which is a better buy today?

Because I expect Brookfield to offer higher growth potential, it also adds to investors’ overall returns with a growing dividend (even though it’s a small yield of about 0.90% now), and it trades at a bigger discount, I’m inclined to recommend Brookfield as a better buy today.

That said, Berkshire Hathaway has no competition in its long-term track record of excellence. Overall, it has outstanding capital allocation and will likely continue to be a company that provides market-like diversification but market-beating returns. If these are the characteristics you’re looking for, you might still buy Berkshire stock today as a core holding. The stock trades at a slight discount.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has positions in Brookfield and Brookfield Infrastructure Partners. The Motley Fool recommends Berkshire Hathaway, Brookfield, Brookfield Corporation, and Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

eat food
Stocks for Beginners

Hungry? These 3 Food Stocks Are Hard to Ignore

Food stocks are some of the best long-term investments on the market. Here are three options that are hard to…

Read more »

A worker uses a laptop inside a restaurant.
Stocks for Beginners

Stubborn Interest Rates: 2 TSX Stocks That Can Play Along (and Even Win)

Higher interest rates are actually good for these stocks. They trade at good valuations and provide nice dividends.

Read more »

Tired or stressed businessman sitting on the walkway in panic digital stock market financial background
Stocks for Beginners

Buying These 2 Stocks Is a Good Way to Hedge Against a Falling Market

Investors looking to hedge against a stock downturn should consider these two stocks as viable long-term picks.

Read more »

Dollar symbol and Canadian flag on keyboard
Stocks for Beginners

2 Canadian Stocks I’ll Be Buying Hand Over Fist in 2023

There are some great Canadian stocks on sale right now. Here's a duo of companies I'm buying that you may…

Read more »

Women's fashion boutique Aritzia is a top stock to buy in September 2022.
Stocks for Beginners

Has ATZ Stock Bottomed Out?

Has ATZ stock finally bottomed out after losing nearly 10% of its value in 2022? Let’s find out.

Read more »

Stocks for Beginners

4 Top Value Stocks to Buy in February 2023

Not only are all these value stocks worth considering, each is growing significantly on the TSX today!

Read more »

Couple relaxing on a beach in front of a sunset
Stocks for Beginners

3 Stocks That Could Help You Retire a Millionaire

Looking for some stocks that can help you retire rich? Here are three buy-and-forget options that will do the trick.

Read more »

Target. Stand out from the crowd
Stocks for Beginners

3 Must-Buy TSX Stocks for Anyone New to Investing

Are you new to investing? These three TSX stocks for income, value, and growth are must-buys for any Canadian investor…

Read more »