Bill Ackman, the billionaire founder of Pershing Square, made headlines earlier this week by making an offer to buy Howard Hughes, an American real-estate business. He actually said that the aim of the deal is to make a “modern-day Berkshire Hathaway“, referring to the business grown by legendary investor Warren Buffett. Should I be aiming to try and follow this strategy too?
How it all works
First let’s run through the concept. Pershing Square Capital Management is the entity that’s trying to buy Howard Hughes for $85 a share. Ackman would form a subsidiary that would merge with the real-estate developer, which would allow him to benefit from the strong cash flow and operating profit from the company. He could then use this funds to go and pursue new investments and dealmaking for Pershing Square.
For clarity, there’s a slight difference between Pershing Square Capital Management and the listed stock Pershing Square. The Capital Management business provides the investment expertise and decision-making for the listed company, with it being a way to offer a publicly accessible vehicle for investors to benefit from Pershing Square Capital Management’s strategies. Both are overseen by Ackman, ensuring alignment in philosophy and objectives.
Ackman openly admits his idea is a nod to Buffett. The Oracle of Omaha famously bought Berkshire Hathaway when it was a textile company. Buffett used the cash generated by Berkshire’s textile operations to invest in other businesses. This has proved to be a very profitable strategy.
How I can do the same
To be clear, I’m not in a position to buy an entire business to benefit from the cash flow benefits for my personal portfolio. But I can copy Buffett and Ackman in the thinking behind this.
For example, part of my existing portfolio is built around owning stocks that pay me dividends. As a result, I get income from these shares, which I can use to fund more stock purchases. This is on a much smaller scale to what Buffett and Ackman do. Yet the principle of using my cash flow to help fund more investments is the same.
For example, I recently bought Balfour Beatty (LSE:BBY) stock. The share price is up 25% over the past year. At the same time, the dividend yield is 2.77%. Even though this isn’t super-high, it should still provide me with income going forward from a mature and stable sector. Buffett went for textiles, Ackman for property, Smith has gone for construction!
I like the stock particularly due to the potential for higher government spending on infrastructure both in the US and UK. These are two main markets for the global firm, with a long history of winning public sector contracts. Therefore, I feel this could provide a sharp boost for revenue in the coming years. I’d expect part of this to filter down to higher dividend per share payments, increasing the dividend yield.
Of course, I’m aware that government promises can be broken and this is a risk going forward. Yet this is just one example of a new stock in my portfolio that should allow me to copy the same concept that helped Buffett to build his empire.
