Duracell trade is sign Buffett is bearish on P&G

November 13, 2014 |

Warren Buffett rarely sells stock. On Thursday, he unloaded Berkshire Hathaway’s entire $4.7 billion stake in Procter & Gamble for P&G’s Duracell battery business.

That’s surely a sign the Buffett isn’t all that confident about P&G’s long-term future.

P&G, the global beauty and home products maker, added about $1.8 billion in cash to the deal. That values Duracell itself at about $2.9 billion. Buffett could presumably have just given P&G stock worth that amount and kept the remaining shares. Instead, he unloaded all 52.8 million shares and, like someone using a dollar bill to buy a 75 cent candy bar, got some change back.

Read More Berkshire Hathaway to buy Duracell from P&G

As Sanford Bernstein analyst Ali Dibadj told Reuters, “I don’t take it as a good sign that Buffett would rather own Duracell than P&G.”

There are, of course, some solid reasons Buffett might want to own Duracell. He has called it “not very exciting, but a good solid business” and it has a strong brand, something he traditionally likes. While the nonrechargeable alkaline battery business doesn’t appear to have a lot of growth potential, Duracell will generate a solid stream of cash. There are also some tax advantages to this kind of trade.

“I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette,” he said in announcing the deal. “Duracell is a leading global brand with top quality products, and it will fit well within Berkshire Hathaway.”

Berkshire observer Lawrence Cunningham, a George Washington University law professor, told Dow Jones he thinks Berkshire has been converting some of its stock stakes into stable, cash-generating businesses as part of a succession plan.

While Buffett rarely sells stock, Thursday’s deal isn’t unprecedented for him. In recent years, Berkshire has exchanged Phillips 66 shares for its pipeline-lubricant unit and Graham Holdings stock for a Miami TV station and some cash.

Even so, Buffett probably wouldn’t have made this trade if he thought P&G has a bright future.

It was never a stock that he picked for the portfolio. Berkshire got its shares in 2005 when P&G bought Gillette, which then owned Duracell. Buffett was a long-time supporter of the razor company as its largest shareholder and past board member.

Over the years, Berkshire cut its P&G stake in half. In 2012, he told CNBC the company’s earnings “have been disappointing now for a few years. … What goes on in the place, what mistakes have been made, what the plans are, I don’t know the answers on that. … The jury’s out on that.”

It now appears the jury has come back with its verdict.