Better Berkshire Hathaway Stock: Visa vs. Chubb Limited

Many investors follow Berkshire Hathawayhis (BRK.A 0.87%) (BRK.B 0.96%) portfolio of nearly 50 stocks and exchange-traded funds for new investment ideas. It’s a great starting point because those investments have been handpicked by Warren Buffett, one of the world’s most respected investors, and his experienced management team.

That’s why it was alarming when Berkshire started selling lots of stock — including half of its stake in Apple and all his actions of HP and Snowflake — during the past year. Cash and cash equivalents also rose to a record $277 billion at the end of the second quarter, suggesting Buffett is hoarding some dry powder in anticipation of a stock market decline.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

But Berkshire did not sell any shares of the card processing giant Visa (V -0.34%) during the past year. It also significantly increased its position in the American-Swiss insurance company Chubb Limited (CB 0.23%). Let’s see which of these resilient financial stocks will generate higher gains over the next 12 months.

Visa faces macro and antitrust challenges

Berkshire began buying Visa stock in the third quarter of 2011. It now owns 8.3 million Visa shares, and that $2.21 billion stake represents 0.7% of its entire portfolio.

Visa operates one of the largest card payment processing networks in the world, but does not issue any credit or debit cards itself. Instead, it relies on banks and financial institutions to work with the company to issue co-branded cards. Those partners actually own all the debt and are responsible for collecting payments.

Visa only makes money by charging merchants swipe fees (typically 1.5% to 3.5%) for each card transaction. It splits these fees with the issuing banks and keeps the rest as income. His rival MasterCard uses the same business model.

Visa’s scale, brand recognition and customer retention make it an evergreen investment. From fiscal 2013 to fiscal 2023 (ended September), its revenue grew at a compound annual growth rate (CAGR) of 11% as its earnings per share (EPS) grew at a CAGR of 16%. It has bought back more than a fifth of its shares over the past decade.

However, Visa is not immune to economic downturns. Inflation has reduced consumer spending over the past two years, and a recession could easily slow its growth. They also face a lot of pressure from antitrust regulators to reduce or cap their swipe fees.

However, analysts still expect Visa’s revenue and earnings to grow 10% and 17%, respectively, in fiscal 2024. Its stock looks reasonably valued at 24 times next year’s earnings, but macro and regulatory issues would could affect his ratings.

Chubb generates stable growth in a volatile market

Berkshire began buying Chubb shares in the third quarter of 2023. It added more shares over the next three quarters and currently owns more than 23 million shares. This $7.37 billion stock represents 2.4% of its portfolio.

It’s not surprising for Berkshire to invest in another insurance company. It already owns major insurers such as GEICO and Gen Re, and last year generated 40% of its operating income from its insurance and investment businesses.

Chubb is the largest publicly traded provider of property, supplemental health and casualty insurance. It is headquartered in Switzerland but operates in 54 countries and territories, while employing approximately 40,000 people worldwide.

The current version of the company was created in 2016 after ACE Limited acquired the original Chubb Corporation and inherited its brand. From 2016 to 2023, Chubb’s revenue grew at a CAGR of 7% as its EPS grew at a CAGR of 14%. Its consolidated net premiums have grown by double-digit percentages over the past three years, while core operating income has grown by double-digits over the past two years. It has also bought back 13% of its shares over the past seven years.

In the first half of 2024, Chubb’s consolidated net premiums and core operating income grew 13% and 16%, respectively. This growth was driven by increased underwriting in property and casualty (P&C), life insurance and investment income.

Analysts expect Chubb’s revenue and adjusted earnings to both rise about 9% for the full year. Those are solid growth rates for a stock that trades at less than 13 times forward earnings and faces fewer macro and regulatory headwinds than Visa.

Buy Better: Chubb

Visa and Chubb are both solid long-term investments, but it’s easy to see why Berkshire hasn’t bought more shares of the former and added more shares of the latter. Visa stock isn’t a screaming bargain and is more vulnerable to an economic slowdown than Chubb. Chubb’s business model is more resilient to economic headwinds, and its stock looks cheaper relative to its growth potential. That’s why I think Chubb has a clear chance to outperform Visa in the coming quarters.