One of the most exciting things to do as an investor is look at what’s famous institutional investors buy and sell. The Securities and Exchange Commission requires large money managers to file a form called 13Fwhich details stocks traded by hedge funds and other sophisticated Wall Street investors.
Perhaps the most followed 13F comes from Warren Buffett’s 13F model. Berkshire Hathaway. In recent quarters, Berkshire’s 13F filings contained an anonymous investment. In other words, investors knew Buffett was moving into a new position, but the company in question remained a mystery.
Although seeking confidential treatment is not that common, this is not the first time Buffett has shown coyness. Still, the secrecy surrounding Buffett’s latest new position has brought an extra layer of appeal to Berkshire’s quarterly reports.
To the surprise of many investors, Buffett’s secret actions were finally revealed in Berkshire’s first-quarter filings. He initiated a position in Chub Limit (NYSE:CB)a Switzerland-based property and casualty insurance and reinsurance underwriter.
Let’s see why Buffett’s choice to invest in Chubb should come as no surprise. After a thorough analysis of the insurance industry, you might find inspiration to follow Buffett’s lead and pick up a few shares of Chubb as well.
A key piece of the bigger puzzle
Although Berkshire Hathaway owns more than 40 individual stocks, Warren Buffett’s portfolio has some key themes. Buffett particularly likes the financial services sector.
Companies such as Bank of America, American Express, Citi Group, Visa, MasterCard, Capital One FinancialAnd Financial Ally is among some of Buffett’s holdings.
While each company above is a bank or payments processor, these positions complement a revered cornerstone of Buffett’s broader financial services portfolio: insurance.
Geico, General Reinsurance Corporation and CapSpecialty are part of Berkshire’s insurance businesses. Given that insurance companies account for the largest portion of Berkshire’s revenue and profits, it’s not entirely surprising to see Buffett add Chubb to his list.
While investing in Chubb is a classic Buffett move, I’d understand if you’re wondering why he owns so many insurance companies. After all, there are many other high growth opportunities in the capital markets.
Why does Buffett like Chubb so much?
Insurance companies tend to be reliable and predictable. Think about it: from healthcare to real estate to your own vehicle, insurance is a service that is always in demand.
Although there are many types of insurers, insurance companies generally make money the same way: by charging customers a service fee for coverage. Since insurance companies receive a constant influx of cash, these companies often allocate a portion of this capital to safe investment vehicles such as bonds or stable stocks.
The combination of underwriting income and investment income provides insurance companies with enormous cash flow. This is another essential pillar of Buffett’s investing style. Berkshire does not take positions in speculative sectors or high-risk stocks. He prefers to acquire large positions in cash flow generating companies.
The chart above illustrates Chubb’s free cash flow over the last 20 years. Not only is it clear that the company has been steadily growing its excess profits, but it is using its cash flow to reward its shareholders.
Similar to its free cash flow, Chubb has also steadily increased its dividend over the past two decades. Benefiting from dividend income is another essential part of Buffett’s philosophy. The long-term trends above likely provide comfort that Chubb will continue to generate strong profits and have the ability to maintain and increase its dividend for years to come.
Should you follow Buffett’s example?
Currently, markets are experiencing increased buying activity, fueled by hype around artificial intelligence, as well as some game-changing new drugs in the pharmaceutical sector and a robust energy industry.
Considering that the S&P500 And Nasdaq Composite have already posted double-digit gains this year, I would say current market sentiment is positive. But that said, remember that Buffett doesn’t follow momentum. He is not known for chasing stocks that have seen dramatic expansion in valuation multiples over a short period of time.
For these reasons, Buffett’s position within Chubb makes perfect sense. Chubb fits his affinity for insurance businesses, while providing Buffett with another source of passive income. Additionally, with a price-to-earnings (P/E) ratio of 11.8, Chubb appears to be trading at a steep discount to the broader market. In contrast, the S&P 500 has a P/E ratio of 24.8.
Chubb might be worth looking at if you’re an investor looking for some exposure beyond more volatile opportunities in technology, healthcare, and energy. While Chubb may not be the most interesting company, it is reliable and shares look cheap right now.
Should you invest $1,000 in Chubb right now?
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Ally is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Bank of America, Berkshire Hathaway, Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Mad Motley has a disclosure policy.
The secret is out: here are the dividend stocks Warren Buffett just poured $6.7 billion into was originally published by The Motley Fool
