This Stock Pays Out Everything. Here’s Why That Scares Me.

Inside a Company That Returns 100% of Free Cash Flow

One of the best investments Warren Buffett has ever made in his career was the purchase of five Japanese trading houses: Mitsui, Mitsubishi, Itochu, Marubeni, and Sumitomo, sometime in 2020. At that time, news broke that Berkshire had invested about $5 billion in these companies. But what makes this incredible isn’t just what he bought, but how he bought them. He borrowed the entire $5 billion in yen, directly in Japan. And he borrowed it at a fixed interest rate of roughly 0.5% per year.

On the other side, these five trading houses had a dividend yield of about 7%. So, he pays approximately $25 million a year in interest (0.5%) on that $5 billion debt, while he collects about $350 million a year in dividends (7% of $5 billion). That is an immediate spread of about $325 million per year. Since the companies have raised their dividends in the meantime, that spread is now around $600 million. That is $600 million free cash entering the company every single year. And on top of that, these five stocks are up roughly 4x since 2020 (on average).

What makes this story truly fascinating is the fact that, according to the reports, Berkshire Hathaway sits on a record mountain of cash exceeding $380 billion. Even though he has this massive amount of cash on hand, he still borrows money to buy these stocks because, mathematically, it is free money. Ultimately, Buffett took on assets in yen and liabilities in yen. If the yen falls by 50%, his assets are worth less in dollars, but his debt is also worth less in dollars. He is perfectly hedged. Boom.

Then let’s go one level deeper. From Buffett’s Japan bet to a place where there are still plenty of fish and very few fishermen.