FORTUNE — When Warren Buffett, the famous and legendarily thrifty investor, bought his first private jet more than 20 years ago, he named it “The Indefensible.” Recently, Buffett has made a sizable investment in a bunch of companies that might fly under the same label.
Last year at Berkshire’s annual meeting, Buffett surprised many when he said he was interested in buying up small newspapers. Buffett has long proclaimed his love for newspapers, but he publicly swore off them in 2009, calling them essentially money pits.
So the announcement seemed odd for someone who’s self proclaimed rule of investing is not to lose money. As a result, Buffett has spent the past year trying to explain his investment thesis.
In his letter this year to shareholders, which was released on Friday afternoon along with Berkshire’s annual report, Buffett takes another crack at it, and he has some new details about his paper buying spree, which kicked off more than a year ago when he bought his hometown paper the Omaha World-Herald.
In all, Berkshire (BRKA) has purchased 28 dailies in the past 15 months. Buffett says the cost for the acquisitions was $344 million, but that includes a bunch of weeklies that Berkshire also got in its May acquisition of Media General, which had 63 papers in all. And for the first time he has included a list of nearly all the daily papers Berkshire now owns. (Tulsa World, which Berkshire announced it was buying in late February, is not on the list.)
Most of the papers are pretty small. The York News-Times, for instance in York, Neb. has 3,253 weekday subscribers. And they come off as a little bit sleepy. A story on bird watching was recently leading the website of the Jackson County Floridan in Marianna, Fl., another paper Buffett has bought in the past year.
Buffett’s investment thesis is that while the Internet has dented their business, newspapers still have an advantage in local news. And he thinks for that reason a “significant percentage of the population” will continue to want them. He says that will be enough to make them viable businesses for a long time.
What’s worrisome, though, is that Buffett admits he still doesn’t have an answer for what is perhaps the biggest business question facing most papers: Should they charge online or not?
What’s more, it’s very hard to tell whether the acquisitions are working out. Berkshire doesn’t offer a lot of financial details on his newspaper unit. Berkshire groups the unit into a sub-category called “other services.” In the notes to its financial statements, Berkshire says the acquisitions added about $350 million in revenue, and that the newspapers as a group were profitable, but probably not very. The profits of the “other services” group fell from a year ago, so whatever profits the newspaper group added were more than offset by losses elsewhere.
Buffett reportedly paid two times cashflow when he bought the Media General group of papers back in May. The New York Times (NYT) trades at nearly eight times cashflow. So it sounds like Buffett got a good deal. But only if that cashflow sticks around. And Buffett has said he expects the sales and profits of Berkshire’s news group to shrink overtime.
And that’s just one acquisition. As a group, the Buffett’s newspapers (excluding the Tulsa paper) now have a daily circulation of nearly 700,000, meaning Buffett has paid $500 per customer. That doesn’t seem bad considering it appears most of the papers charge about $150 for an annual subscription. Add on top of that advertising revenue and whatever Buffett is getting from the weeklies.
But put another way, Buffett appears to be paying about one times sales. That seems like too much. Shares of the New York Times currently fetch about 60% of that company’s sales.
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But whether Buffett is underpaying or overpaying might not be the right question anyway. Buffett says he doesn’t think the newspaper group will ever be big enough to give a meaningful boost to Berkshire’s revenue or earnings. So why do it? Buffett has said that he and Charlie Munger, his long-time second-in-charge, like newspapers.
With a society that still values journalism (I hope), it’s nice to know that the world’s greatest investor thinks there is a future for newspapers. But as a shareholder, is it really a great thing to have your CEO spending time a lot of time doing acquisitions that by his own admission won’t make a heck of a lot of difference?
And you can have the attitude that as long as he doesn’t lose money, allowing Buffett to buy newspapers is the cost of keeping the world’s greatest investor engaged. But Buffett has never seemed to be the type who was unhappy at his job. Fortune Senior Editor-at-Large Carol Loomis’ recent book on Buffett is titled Tap Dancing to Work.
Of course, lots of CEOs use shareholders money to indulge their hobbies. And in Buffett’s case, as a large Berkshire shareholder, a good bit of that money is his own. Still, I’m not sure that makes it defensible.