For the second straight year, Berkshire Hathaway CEO Warren Buffett bemoaned a lack of viable acquisition targets for his sprawling conglomerate, noted the company’s vast stock holdings grew and said the firm is reaping significant gains from the big federal tax cuts.
Buffett, the world’s third-richest person, also downplayed Berkshire’s $25.4 billion fourth-quarter net loss that resulted from the tumbling paper value of its stock portfolio amid the market’s turbulence late last year and troubles at Kraft Heinz. In his characteristically no-nonsense, folksy style, the 88-year-old Buffett advised shareholders to focus on operating earnings.
Berkshire Hathaway’s vast holdings include companies such as auto insurer Geico, Dairy Queen and BNSF Railway Company.
Here are some key takeaways from Buffett’s annual letter to Berkshire shareholders:
Berkshire’s overall performance
Berkshire was hit with a $25.4 billion loss in the fourth quarter, down from a $32.6 billion profit in the same period a year ago. A new rule requires public companies to account for unrealized paper gains or losses, and Berkshire boasts a huge stock portfolio that includes stakes in some of the country’s largest corporations.
For the year, Berkshire earned $4 billion, down from $44.9 billion in 2017, because of the accounting rule.
“In the fourth quarter, a period of high volatility in stock prices, we experienced several days with a ‘profit’ or ‘loss’ more than $4 billion,” Buffett wrote. “Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety.”
Berkshire also got hammered by its controlling interest in beleaguered Kraft Heinz. Berkshire wrote down $3 billion in its investment in the company, which this week reported a $14 billion loss and disclosed that the Securities and Exchange Commission is investigating its accounting practices.
Operating profits jumped 72 percent to $5.7 billion last quarter. And operating profits for the entire year rose 71 percent to $24.8 billion.
Revenue grew 3.3 percent to $247.8 billion in 2018.
Scooping up other company’s is Berkshire’s lifeblood but Buffett again lamented a dearth of viable acquisition targets at sensible prices.
“Prices are sky-high for businesses possessing decent long-term prospects,” Buffett wrote. “That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities. We continue, nevertheless, to hope for an elephant -sized acquisition.” He added, parenthetically, that “just writing about the possibility of a huge purchase has caused my pulse rate to soar.”
Stock portfolio grows
The market value of Berkshire’s holdings increased to $172.8 billion at the end of last year from $170.5 billion at the end of 2017. The portfolio features household names such as Apple, American Express, Coca-Cola and Delta Airlines.
“Many stocks have offered far more for our money that we could obtain by purchasing businesses in their entirety,” Buffett wrote. As a result, he added, Berkshire bought about $43 billion in stocks last year while selling only $19 billion.
Cash reserves are plentiful
Berkshire continues to maintain a huge hoard of $112 billion in cash, U.S. Treasuries and related holdings.
“At times, our stock will tumble as investors flee from equities,” Buffett wrote. “But I will never risk getting caught short of cash.”
Berkshire book value downplayed
In previous years, Buffett led his letter with the company’s book value. Last year, however, it’s per-share both value edged up 0.4 percent, compared with a 23 percent rise in 2017.
Buffett said he’s reducing the emphasis on book value going forward because the company has transitioned from one whose assets are concentrated in stocks to one focused on its operating businesses, leading to volatile swings in its book value. And while Berkshire’s stock holdings are valued at current market prices, its operating companies’ book values are typically far below their current market values, he wrote.
Berkshire’s pretax income from its noninsurance businesses increased 24 percent to $20.8 billion. BNSF and Berkshire Hathaway energy combined earned $9.3 billion, up 6 percent from 2017.
Buffett noted that the company’s after-tax income jumped 47 percent because of the new tax law, which cut the corporate tax rate to 21 percent from 35 percent.
“The new tax law made our businesses and the stocks we own considerably more valuable,” Buffett wrote.
Berkshire’s insurance units recorded a $2 billion pretax operating profit last year, up from a $3.2 billion loss in 2017 as a result of hurricanes Harvey, Irma and Maria. He said the property and casualty insurance businesses have posted an underwriting profit for 15 of the past 16 years.
Buffett called the insurance firms “the engine propelling Berkshire’s growth since 1967.” He particularly likes their business model that relies on “float” – taking premiums that typically exceed expenses and losses, and investing the money in other assets that further grow income.
Stock repurchases continue
With lots of cash and no acquisition targets, Berkshire continued to buy back shares at a healthy clip, helping boost its stock price. In the fourth quarter, the company bought $74.8 million in Berkshire stock. Buffett is unapologetic about the practice, which some analysts have broadly criticized as creating far fewer benefits for the economy than capital investments.
“Assuming that we buy a discount to Berkshire’s intrinsic value – which certainly will be our intention – repurchases will benefit both those shareholders leaving the company and those who stay,” Buffett wrote.
Deficit? What deficit?
Amid growing angst about the growing federal deficit – expected to approach $1 trillion in the current fiscal year — Buffett advised shareholders to relax and continue to invest in the country through publicly traded stocks.
“Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400 fold” the past 77 years, Buffett wrote. People who panicked “might have eschewed stocks and opted instead to buy” gold. And they would have netted 1 percent of what an investment in a Standard & Poor’s 500 index fund would have generated.
Citing an “American tailwind,” he wrote in closing, “We are lucky – gloriously lucky – to have that force at our back.”