Warren Buffett's Cheap Debt Bet On These Japanese Stocks Is Minting 'Infinite Returns', Fund Manager Calls It A 'No-Brainer'

Warren Buffett in 2020 got Berkshire Hathaway BRKBRK to borrow yen at roughly 0.5 percent, bought five Japanese blue-chip trading houses paying total shareholder yields of 7-8 percent, and turned it into what investment fund manager Mohnish Pabrai describes as a ‘no-brainer’ with ‘infinite return.’

What Happened: Warren Buffett marked his 90th birthday by quietly amassing just over 5 percent of each of Japan's five largest trading companies — Itochu ITOCY, Marubeni MARUY, Mitsubishi Corp. MTSUY, Mitsui & Co. MITSY and Sumitomo Corp. SSUMY — a position worth about $6 billion when revealed on Aug. 31 2020.

A year earlier, Berkshire tapped Tokyo's bond market for 430 billion yen ($4 billion) at coupons ranging from 0.17 percent to 1.1 percent, locking in funding costs that averaged roughly 0.5 percent.

As explained by Pabrai in a recent podcast, at purchase, the five firms offered blended dividend yields near 5 percent and were buying back stock aggressively, pushing total shareholder yield toward 8 percent. On $6 billion of stock, that meant about $480 million a year in cash returns, versus approximately $30 million of interest expense on the yen loans. The spread delivered roughly $450 million of "carry" with almost no equity at risk.

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Marubeni's New-York-listed ADR, for instance, closed 2020 at $66.81 and is currently at $195 according to Benzinga Pro data — well over a 190 percent gain. Similar moves across the other four houses doubled Berkshire's original stake to roughly $12 billion by late 2024, according to Barron's analysis.

Because virtually the entire position was funded with debt, Buffett's return on the sliver of equity he did commit is mathematically “infinite” — he recouped his capital via dividends long before the share-price moonshot.

Buffett told Nikkei TV last year he was "very proud" of the group's disciplined capital-return policies. Trading houses trade at single-digit price-earnings multiples against steady commodity-linked cash flows, a contrast to America's stretched valuations.

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