One of the most watched annual events in global investment is about to occur.
Berkshire Hathaway is about to report its December quarter and 2022 figures in the next week or so, along with its December 31 portfolio statement and, more importantly, the latest letter to investors from chairman Warren Buffett.
This will be the 45th letter Buffett has composed for shareholders since starting the now legendary missive back in 1977.
Long known as the ‘Oracle of Omaha’, Buffett’s annual letters and his occasional interviews are looked forward to for his views which can move share prices or drag stocks into focus for the rest of the market, as he has done with Apple in the past and energy giants Chevron and Occidental Petroleum just last year.
This year’s letter could be quite dramatic with Berkshire’s vice chairman, Charlie Munger turning 99 on January 1 he has been reducing his other corporate involvements and there is rising speculation he and Buffett could announce a change of roles at Berkshire Hathaway.
And there is a plethora of other subjects for Buffett to comment on in his letter – some that are dear to his heart – from Wall Street ethics, cryptocurrencies and tech stock values, banks, financiers, climate change and lately energy, electrification and renewables (Berkshire Energy is a major renewable energy operator).
With the collapse of the cryptoverse and massive losses, problems in tech and rising interest rates, there are rich pickings there for Buffett to mine with his usually pithy and acute commentary.
After taking a pounding in much of 2021 and early 2022, Berkshire shares suddenly became investor favourites as he and his key managers built positions in Chevron and Occidental – at a time when it was unpopular to do so; maintained a big stake in Apple, built on big holdings in Japan’s five major trading houses, bought a small US insurer and rode out the rough year that was 2022 very nicely.
Share buybacks were slashed as Buffett made the judgement there was better value in other listed companies than Berkshire.
Up to the end of September, Berkshire had cut its share repurchases in 2022, to just over $US5 billion, against $US27 billion in 2021 and $US25 billion in 2020.
Both 2020 and 2021 were Covid pandemic years and the huge buybacks by Buffett was a rational decision about value – when you don’t know what damage an unknown like a pandemic will do the economy, earnings and value, it was better to buy the devil he did know a lot about – Berkshire shares.
Berkshire’s 48-share portfolio that dived under $US300 billion in the three months to December, according to US financial reports.
The size and make up of that portfolio will be updated on February 14 in Berkshire’s December quarter fund manager’s report to the US Securities and Exchange Commission.
Of those 48 stocks, just 10 saw gains in 2022. On the other hand, its biggest position, Apple, fell 27% (shedding more than $US800 billion in the process). Apple shares though are now up more than 20% so far this year.
You would have thought that the slide in the value of Apple shares might have been more negative for Berkshire in 2022, but it wasn’t.
The worst stocks owned by Berkshire Hathaway in 2022 were South American online bank, Nu Holdings and Snowflake, the cloud computing company. Both sank 57%.
In spite of these losers, Buffett still saw some huge gains in Berkshire’s stock portfolio.
The best was energy group Occidental Petroleum whose shares jumped more than 117% in 2022 (assuming no sales in the December quarter). Chevron shares leapt more than 53%, McKesson (a drug store chain) saw its shares rise over 50%, Coca Cola shares were up 7%, Kraft Heinz shares (Berkshire owns 26%) jumped 13.4%.
In late January, Chevron revealed a massive $US75 billion expansion of its current buyback which will suit Buffett whose policy is to not sell into buybacks and allow the Berkshire stake to rise as a percentage of target company’s capital. That’s what he is doing in Apple (It has an $US89 billion buyback at the moment).
The Chevron issue though is much larger as a proportion of its market value – close to 25%. Berkshire already owns 8.64% of Chevron and this buyback could see that rise to close to 11%, without spending a dollar.
With Munger turning 99, succession could get greater investor attention this year – Buffett turns 93 in August. He has already named senior executive Greg Abel as his successor. But a successor for Munger has not been made public.
While many Berkshire holders would like to see Buffett stay at the helm for as long as possible, his remaining time as CEO could be limited given his age.
Based on his performance at the annual meeting last April, though, Buffett remains as sharp as ever, as he held forth for about six hours on a range of financial topics. He faces another AGM in early May.
In 2023 Berkshire has a couple of big deals facing it.
Berkshire is almost certain to exercise its option to add to its now 38% stake in Pilot Travel Centers, an operator of truck stops, in early 2023. That 41% interest could cost about $US4 billion.
There also could be an outlay in 2023 of about $US8 billion if the estate of Walter Scott, who held an 8% stake in Berkshire’s big utility business, Berkshire Hathaway Energy, decides to sell that interest to Berkshire.
Scott, a long-time friend of Buffett and Berkshire board member, died in 2021. It’s possible the estate could ask for Berkshire shares instead of cash.
Berkshire’s earnings will get a lift from higher dividend income, given that the company bought more than $US50 billion or so of stocks in 2022 (on a net basis), and interest income on Berkshire’s cash should run at about $4 billion, based on its cash holdings—mostly US Treasury bills—of $US105 billion on September 30, thanks to the rapid rate rises driven by the US Federal Reserve’s monetary policy tightening in 2022.
Hurricane Ian in late September last year will have a large negative impact on the performance of Berkshire’s insurance returns.
Berkshire’s cash on hand (the fabled ‘float’) is likely to be lower on December 31, 2022, because Berkshire paid out nearly $US12 billion for Alleghany.
Berkshire though is likely to offset that drain by selling off Alleghany’s $US15 billion bond portfolio and push the cash (and Alleghany’s cash reserves), into more equities.
And since the start of 2023, Berkshire has sold shares (again) in Chinese electric vehicle and battery group, BYD – it still has a big stake around 13% but January’s sale makes seven disposals in seven months.
