Warren Buffett’s Berkshire Hathaway made a $US25.4 billion loss in the fourth quarter due to an unexpected write down at Kraft Heinz Co and unrealised investment losses on stocks such as Apple after the late sell-off in 2018.
It was the largest quarterly loss since at least the early 1990s, according to data provider Refinitiv (Reuters data’s new name). It nearly wiped out the group’s profit for the year.
Berkshire reported a full-year net profit of $US4 billion, down from $US44.9 billion a year before which was boosted by one-time tax gains from Trump’s tax cuts which were just as misleading as the market to market accounting changes now mandatory for companies like Berkshire.
Many of the shares on which it was forced to take an accounting loss for the quarter (such as Apple) have since rebounded, meaning the company will be forced to declare a profit for this quarter – but not for Kraft Heinz which has become Buffett’s biggest embarrassment and blackhole.
For the 4th quarter, Berkshire reported operating earnings of $US5.7 billion, up from $US3.3 billion a year earlier, due to increased earnings from its railroads, energy business, and other segments.
For the year, Berkshire reported $US24.8 billion in operating earnings. That was a record high, Mr. Buffett said in his annual letter to shareholders that was also released Saturday.
It was the slump in share prices in the 4th quarter, and the problems and huge write off at Kraft Heinz that caused all the damage.
Berkshire reported a loss of nearly $US28 billion on the drop in its equity and derivative investments, as well as a further $US3 billion impairment charge related to its 26.7% stake in Kraft Heinz.
Kraft shares slumped 27% on Friday after it revealed late Thursday that it would take a $US15 billion write-down, cut its dividend, revealed a fall in earnings and disclosed that it was the subject of a probe by US securities regulators over its accounting policies.
Reuters pointed out that while dated Saturday, “Buffett’s shareholder letter is written well in advance, and did not discuss Kraft Heinz’s travails or the day-to-day management of that company by 3G Capital, the Brazilian firm and Buffett business partner.”
Shareholders will no doubt have questions for him and Munger at the annual meeting in May.
Berkshire has not made a major acquisition since paying $US32.1 billion for aircraft parts maker Precision Castparts in January 2016 (Kraft Heinz was the year before in a joint venture with 3G Capital, the owner of 26.7% of the food group as well).
Buffett said in his letter to shareholders that the near-term prospects for more acquisitions by Berkshire were “not good,” because prices are “sky-high” for businesses that had decent long-term prospects.
While Buffett said the thought of an “elephant-sized” acquisition causes his heart to beat faster, the “disappointing reality” was that Berkshire would likely in 2019 use some of its $US111.9 billion of cash to buy more stocks.
And that will add to the earnings volatility caused by the accounting rule change.
Accounting rules now require Berkshire to include changes in the value of its multibillion-dollar stock portfolio — which includes its stakes in iPhone maker Apple, beverage giant Coca-Cola and banks Bank of America, Wells Fargo, Goldman Sachs, American Express and dozens of other stocks— alongside its quarterly operating results.
Buffett again criticised the rule change in his shareholder letter.
“Neither Berkshire’s vice-chairman, Charlie Munger, nor I believe that rule to be sensible,” Mr. Buffett said. “Both of us have consistently thought that at Berkshire this mark-to-market change would produce what I described as ‘wild and capricious swings in our bottom line.’”
