Brookfield Corporation(NYSE: BN) has been a top-performing stock over the decades. The leading global investment manager has delivered an 18% annualized return over the last 30 years. That has beaten the returns of many great companies -- including Berkshire Hathaway's(NYSE: BRK.A)(NYSE: BRK.B) 13% annualized return -- and the S&P 500(SNPINDEX: ^GSPC) (11% annualized).
Brookfield Corporation has become a lot more like Berkshire Hathaway in recent years. That strategy puts it in a strong position to continue delivering market-crushing returns for its investors.
Taking a page out of Warren Buffett's playbook
Warren Buffett and his team have transformed Berkshire Hathaway from a textile manufacturer into a vehicle they use to grow shareholder value. The company uses shareholder capital and the float from its insurance business (Geico and others) to buy operating companies (e.g., BNFS, Dairy Queen, See's Candies, and many others) andinvest in publicly traded stocks (e.g., Apple). Those operating companies generate cash that Berkshire retains to invest in additional operating companies and stocks.
Brookfield Corporation started out as an owner/operator of real assets like real estate, renewable power-generating facilities, and infrastructure. It uses the cash flows those businesses produced to acquire additional operating businesses. The company has also leveraged its expertise as an operator to start managing capital for outside investors, which led to the creation of the leading alternative asset manager, Brookfield Asset Management.
The company has since taken a page from Buffett's playbook by expanding into the insurance industry. It has acquired several insurance businesses in recent years. That strategy has grown its insurance assets from $2 billion four years ago to more than $120 billion today. That provides a growing capital float that it can invest into its asset management business. Its insurance business (Brookfield Wealth Solutions) also generates significant earnings ($1.6 billion annualized), which gives it more cash to invest.
A compounding machine
Brookfield has a very similar investment strategy to Berkshire Hathaway. It buys high-quality businesses at value prices. The company then takes a very hands-on operating approach, striving to maximize the earnings of an acquired business and its value. It will typically reinvest capital into its existing businesses through organic expansion projects and bolt-on acquisitions to transform them into global leaders with significant earnings power.
The company also expects to grow its wealth solutions business significantly over the coming years. It's targeting to increase its insurance assets to around $300 billion in five years. That puts it on track to roughly triple the annual earnings capacity of the business. This earnings growth will give the company more capital to invest in funds managed by Brookfield Asset Management and expand its operating companies.
However, the wealth solutions platform is only one growth driver. Brookfield believes its combined businesses will produce a staggering $47 billion in cumulative free cash flow over the next five years, which it can allocate to creating additional value for shareholders. That will come through a combination of reinvesting to grow its operating businesses (including making acquisitions), opportunistically repurchasing shares, and paying a growing dividend (something Berkshire doesn't do).
Brookfield believes that expanding its wealth solutions business and its ability to wisely allocate its robust cash flows (along with its other growth drivers) will fuel more than 20% annual earnings-per-share growth over the next five years. That supports the company's view that it can grow the intrinsic value of the firm to more than $175 per share by the end of the decade (well above its recent $60 trading price).
A potentially enriching investment
Brookfield Corporation has produced market-crushing returns over the years. That should continue as the company grows its Berkshire-inspired wealth solutions business and wisely allocates the capital generated by its operating companies. That upside potential makes it look like a great stock to buy and hold, especially for those who like Buffett's Berkshire Hathaway.
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Matt DiLallo has positions in Apple, Berkshire Hathaway, Brookfield Asset Management, and Brookfield Corporation and has the following options: short February 2025 $275 calls on Apple. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Brookfield, Brookfield Asset Management, and Brookfield Corporation. The Motley Fool has a disclosure policy.
