Berkshire Hathaway
repurchased $ 9 billion in shares in the fourth quarter, while the company continued its aggressive share buyback program.
Fourth-quarter repurchases, which followed $ 9 billion in similar stock repurchases in the third quarter, raised the total in 2020 to $ 24.7 billion, from $ 4.9 billion in 2019.
In his annual letter to shareholders, CEO Warren Buffett noted that Berkshire (ticker: BRK.A, BRK.B) repurchased 5.2% of its shares during 2020.
“Last year, we demonstrated our enthusiasm for the spread of Berkshire properties by buying back the equivalent of 80,998 ‘A’ shares, spending $ 24.7 billion on the process. This action increased your stake in all Berkshire businesses by 5.2%, without requiring you to even touch your portfolio, ”wrote Buffett.
“Following criteria [Vice Chairman Charlie Munger] and I long ago recommended that we make these purchases because we believed that they would increase the intrinsic value per share for permanent shareholders and leave Berkshire with more than ample funds for any opportunities or problems it might encounter. “
Repurchases appeared to continue at a high pace in the current quarter, with Berkshire repurchasing more than $ 4 billion in shares through mid-February, based on our analysis using the share count disclosed in the annual report.
Berkshire ended 2020 with ample cash and cash equivalents of $ 138 billion, up from $ 128 billion at the end of 2019, but below about $ 145 billion on September 30.
Repurchase activity may encourage investors on Monday, because the considerable fourth-quarter buyback indicated that Buffett found the shares attractive in the fourth quarter, even with an appreciation of around 10%.
Class A shares of Berkshire, which closed Friday at $ 364,580, were up 4.7% so far in 2021. Class B shares, which rose 3.7% this year, closed Friday at $ 240, 51.
Buffett said Berkshire will be judicious in share buybacks. “In no way do we think Berkshire shares should be repurchased simply at any price,” he wrote. “I emphasize this point because American CEOs have an embarrassing record of dedicating more company funds to repurchases when prices have increased than when they have plummeted. Our approach is just the opposite. “
Continuous stock repurchases so far in 2021 indicate that Buffett sees stocks as an attractive trade for less than 1.3 times the end-2020 book value of $ 287,000 per class A share. This is below an average of around 1.4 times the book value in the last five years. Financial data in the annual report also highlighted missed investment opportunities in 2020, as Berkshire was unable to capitalize on market turmoil earlier this year.
Berkshire was a net seller of more than $ 8 billion in shares in 2020, by liquidating airline stakes and some financial stocks, including
JPMorgan Chase
(JPM) and
Goldman Sachs Group
(GS). Buffett continued to find few companies to buy, as Berkshire spent about $ 2 billion on acquisitions, mainly related to the purchase of gas pipeline assets.
Domain Energy
(D). What Buffett calls an elephant-sized deal remains elusive.
Berkshire’s fourth quarter operating earnings increased 19%, to about $ 3,224 per class A share, over earnings on the company’s rail, utility and energy businesses and reduced insurance underwriting losses. Total operating profit increased 14% to $ 5 billion in the period.
Total earnings for the quarter were huge, $ 35.9 billion, reflecting $ 30 billion of investment gains driven by paper profits in the company’s equity portfolio, which totaled $ 281 billion at the end of the year. Fourth-quarter earnings increased 23% over the same period in 2019, when Berkshire also benefited from the strength of the stock market.
For the year, Berkshire’s operating profits fell 9% to $ 21.9 billion. Buffett commented on the performance in the annual letter.
“Operating earnings are what count most, even during periods when they are not the largest item in our total GAAP,” he wrote. “Our focus at Berkshire is to increase this segment of our revenue and acquire large, well-off companies. Last year, however, we did not achieve any goals: Berkshire did not make significant acquisitions and operating profit fell 9%. However, we have increased the intrinsic value per share of Berkshire, retaining profits and repurchasing about 5% of our shares ”.
Buffett tells investors to focus on operating profits because gains on paper in the stock portfolio that appear in the income statement are unique events with no predictive value.
Investors tend not to focus too much on Berkshire’s quarterly earnings fluctuations, opting to follow long-term trends.
Buffett wrote in the letter that Berkshire has four “gems” among its many assets and businesses. They are his huge property and casualty insurance operations led by Berkshire veteran Ajit Jain; railway operator Burlington Northern Santa Fe; Berkshire Hathaway Energy, primarily a utility company in which Berkshire owns 91%; and a 5.4% stake in
Apple
(AAPL).
Burlington Northern, the largest railroad in the United States in terms of cargo volume, is probably worth an amount similar to its closest rival,
Union Pacific
(UNP). Berkshire Hathaway Energy is probably worth $ 50 billion or more based on its earnings of $ 3.4 billion last year and the price at which the company bought insider shares. Union Pacific has a market capitalization of $ 138 billion.
Berkshire owned 908 million shares of Apple worth $ 120 billion at the end of 2020. Berkshire’s current market value is around $ 565 billion.
Buffett compared the heavy investments in shares of his insurance units, made possible by the company’s financial strength, to the portfolio full of rival securities.
“[B]Onds is not the place to be today. Can you believe that the recently available income from a 10-year US Treasury bond – the yield was 0.93% at the end of the year – fell 94% from the 15.8% yield available in September 1981? In some large and important countries, such as Germany and Japan, investors get a negative return on trillions of dollars of sovereign debt. Fixed income investors around the world – whether pension funds, insurance companies or retirees – face a bleak future. “
Buffett acknowledged that Berkshire overpaid for the purchase of Precision Castparts in 2016, an aircraft parts maker that was hit hard by the aerospace crisis, by about $ 33 billion.
Berkshire had $ 11 billion in asset write-offs in 2020, with almost all of that attributable to Precision Castparts.
“I paid a lot for the company. No one fooled me in any way – I was too optimistic about the CCP’s normalized profit potential. Last year, my miscalculation was debunked by adverse developments across the aerospace industry, the PCC’s most important customer source, ”wrote Buffett.
Precision Castparts was Berkshire’s largest acquisition in the past 10 years. In its annual report, Berkshire said the unit’s revenues fell 29% in 2020, to $ 7.3 billion, while pre-tax profits decreased 64.5% to $ 650 million. The company reduced its global workforce by 40%.
“The PCC has taken aggressive restructuring measures to resize operations in response to the reduced volumes expected in the aerospace markets,” said Berkshire.
Buffett noted that Berkshire’s annual meeting on May 1 will be virtual, as it was last year, and will be held in Los Angeles, the home of Vice President Munger. The meeting – a Woodstock for capitalists, as Buffett calls it – is usually held in the hometown of Berkshire, Omaha, Neb.
Buffett wrote that he is excited that Munger will share the stage with him to answer questions from shareholders, and that Berkshire vice presidents Greg Abel and Ajit Jain will be available to answer questions about his operations. Abel oversees the non-insurance businesses of Berkshire and Jain, the insurance empire.
“And now – drum roll, please – a surprise,” wrote Buffett. “This year our meeting will be held in Los Angeles … and Charlie will be on stage with me offering answers and observations during question time of 31⁄2 hours. I missed him last year and, most importantly, you clearly missed him. “
This could be one of the last meetings where the legendary duo shares the stage, with Buffett now 90 and Munger 97.
Buffett did not discuss the CEO’s succession in the letter, but continued his practice. Barron’s and many other observers have speculated that Abel will follow Buffett as CEO.
Write to Andrew Bary at [email protected]