As dramatic as the outperformance of Berkshire Hathaway’s investment portfolio was in 2016 (up 23%), and book value of the company rising 11%, the actual operating performance of the Buffett empire was a lot like the US economy in the same year – patchy in places and nothing really to write home about.
Berkshire said it boosted its workforce by 1.8% to more than 367,000 (making it a sizeable employer, even by US standards) – that is usually a good sign of the underlying position of the 90 or more companies and groups owned by Berkshire.
Fourth-quarter profit rose 15% from a year earlier, as gains from investments and financial derivatives offset lower profit from the Burlington Northern Santa Fe railroad and other operating units.
For the quarter, Berkshire’s net income rose to $US6.29 billion, from $US5.48 billion, helped by a $US1.1 billion increase in gains from investments and derivatives.
Quarterly operating profit fell 6% to $US4.38 billion, from $US4.67 billion. Operating profit for the full year rose just 1% to $US17.58 billion, despite January’s $US32.1 billion purchase of aircraft parts maker Precision Castparts Corp, Berkshire’s largest acquisition.
For all of 2016, profit, including investment gains, was virtually unchanged, at $US24.07 billion down from $US24.08 billion in 2015.
Book value per Class A share, reflecting assets minus liabilities and which Buffett calls a good measure of Berkshire’s “intrinsic worth", rose 11% to $US172,108.
At the close on Wall Street on Friday, Berkshire’s Class A shares ended at $US255,040, and its Class B shares closed at $US170.22. Both were record closing highs and both are up nearly 4% so far in 2017, lagging the 4.85% rise in the S&P 500 so far.
The shares outperformed the Standard & Poor’s 500 stock index including dividends by 11.4 percentage points in 2016, after lagging by 13.9 percentage points in 2015.
As usual, the Berkshire insurance units dominate the result and the finances of the empire. They had a combined float of $US91.6 billion at the end of 2016, but the recent AIG deal will boost that by more than $US10 billion.
(The float is the premiums and other payments received before claims are paid. Buffett uses to fund acquisitions and other investments).
The insurance businesses had a fourth-quarter underwriting gain of $US548 million, driven by results at Berkshire Hathaway Reinsurance Group. That compares with $US306 million a year earlier. Investment income from the units fell to $US889 million from $US1.03 billion during the same period in 2015.
Profit at BNSF, Berkshire’s largest purchase before Precision Castparts, fell 8% to $US993 million.
The railroad has been hurt by falling coal and industrial volumes, but Buffett defended the company, saying in the annual report that society “will forever need huge investments” in transportation, and BNSF is well-served by a strong balance sheet, recent capital upgrades, and a growing emphasis on clean technology.
“Coal had the largest decline, driven by structural changes in that business as well as competition from low natural gas prices,” Berkshire said in its annual report.
“While natural gas prices and the amount of electricity burn will affect the demand for coal in 2017, our long-term demand outlook for US and global coal consumption is lower.”
Berkshire Hathaway Energy, another major business, posted a 2% in profit, to $432 million. The business operates electric grids in the U.K., natural gas pipelines that stretch from the Great Lakes to Texas and power companies in states including Iowa and Nevada. it is now a major investor in renewables.
The manufacturing, service and retail segment, which includes toolmaker Iscar and chemical company Lubrizol, lifted earnings by $US1.17 billion, compared with $US1.07 billion a year earlier.
In the fourth quarter, Dow Chemicals converted Berkshire’s $US3 billion preferred stake to more than $US4 billion of common shares, resulting in a gain of about $US1.2 billion and boost to total profit. The total gain on investments and derivatives was $US1.9 billion for the quarter).
The investment dates to Dow’s 2009 takeover of Rohm & Haas, a transaction that Buffett helped finance. Berkshire said in its annual report that it sold the Dow common stock by the end of December.
While Buffett-watchers pored his words, this year’s missive came on the heels of Mr Buffett’s decision, with his investment partners 3G, to pull a $US143 billion bid for Unilever by Kraft Heinz. That deal bid and the withdrawal were not mentioned in the 2017 letter.
