Rising stocks fuel record profit for Warren Buffett’s Berkshire

Warren Buffett’s Berkshire Hathaway Inc posted a 23 per cent decrease in quarterly operating profit, while soaring prices in stock holdings such as Apple Inc enabled the conglomerate to smash its old record for full-year earnings.

Warren Buffett forcefully defended Berkshire Hathaway Inc’s decision to invest heavily in stocks of companies such as Apple Inc as he labors through a four-year drought since his last major acquisition of a company.

Buffett, also used his annual letter to Berkshire shareholders to assure they should not worry about the future of the company, which is “100 per cent prepared” for when he and 96-year-old Vice Chairman Charlie Munger are no longer around.

Berkshire also posted record full-year earnings of $81.42 billion, nearly twice the prior high from 2017, boosted by unrealized gains from its stock investments. Operating profit, however, fell 3 per cent to $23.97 billion.

In his annual letter to Berkshire shareholders, Buffett defended Berkshire’s foray into stocks, which comes amid a four-year drought since its last major acquisition that has left Berkshire sitting on $128 billion of cash.

Berkshire did step up repurchases of its own stock, buying back roughly $2.2 billion after repurchasing $2.8 billion in the prior nine months. “I am delighted with the increased commitment to share repurchases,” said Thomas Russo, a partner at Gardner, Russo & Gardner, which invests 13 per cent of the $13 billion of assets it oversees in Berkshire. “It may be a very large arrow in Berkshire’s quiver to increase intrinsic value on a per-share basis.

Fourth-quarter operating profit fell to $4.42 billion, or approximately $2,720 per Class A share, from $5.72 billion, or about $3,484 per share, a year earlier, hurt by underwriting losses in its reinsurance operations.

Berkshire also posted quarterly net income of $29.16 billion, compared with a net loss of $25.39 billion a year earlier, reflecting gains in its common stock holdings.

For all of 2019, net income totaled $81.42 billion, topping the record $44.94 billion for 2017, when Berkshire benefited from that year’s reduction in the US corporate tax rate.

Such huge swings stem from an accounting rule requiring Berkshire to report paper gains and losses from its stock holdings with net income even if it sells nothing.

Buffett wrote that the companies whose stocks Berkshire owns are generating returns that are “remarkable under any circumstances,” and “truly mind-blowing” compared to low single-digit returns available on bonds.

“Over time, Charlie and I expect our equity holdings--as a group--to deliver major gains, albeit in an unpredictable and highly irregular manner,” Buffett wrote, referring to Berkshire Vice Chairman Charlie Munger.

Apple soared 86 per cent in 2019 and 31 per cent in the fourth quarter alone, leaving Berkshire with a $73.67 billion year-end stake.

Despite the record results, Berkshire’s stock was a laggard in 2019, rising 11 per cent compared with a 31.5 per cent gain in the Standard & Poor’s 500 including dividends, in part reflecting the drag from the cash stake.

Among other Berkshire units, quarterly profit increased 4 per cent at the BNSF railway, while Geico posted a small underwriting loss.

Insurance float, which is premiums collected before claims are paid and helps fund Berkshire’s growth, grew 5 per cent last year to $129.4 billion, Berkshire said.

The Omaha, Nebraska-based conglomerate ended the year with a $128 billion cash hoard, after repurchasing $2.2 billion of stock in the fourth quarter and $5 billion in 2019.

“I do think it’s on the right path,” said James Armstrong, president of Henry H. Armstrong Associates in Pittsburgh, which invests one-fourth of its assets in Berkshire. “Its balance sheet is exactly the type of toolkit you’d like to leave a successor.”

Berkshire has more than 90 units employing 391,539 people, including the BNSF railway, Geico car insurer, Dairy Queen ice cream and See’s candies; clothing and jewellery companies, and namesake utility and real estate brokerage businesses.

It also invests in such companies as American Express Co, Bank of America Corp and Coca-Cola Co.

Berkshire ended the year with a $128 billion cash hoard, having made no major acquisitions since paying $32.1 billion in January 2016 for aircraft parts maker Precision Castparts, and Buffett lamented his inability to find big companies to buy.

“The opportunities to make major acquisitions possessing our required attributes are rare,” he wrote.

Agencies