Warren Buffett is again trying to reassure shareholders and the wider markets that he retains a strong appetite for acquisitions and equity investments.
He says he hasn’t found many of either that interest him at today’s inflated prices – except one: Berkshire Hathaway itself, on which Buffett spent another $US27 billion buying back his company’s shares last year, to take the 2020-21 total to $US51.7 billion.
The two-year total is more than the previous largest investment – Precision Castparts bought for $US37.2 billion in August 2015 and now a shadow of itself after the Covid pandemics badly damaged the company’s key market – aviation, especially passenger jets and engines.
Stock buybacks amounted to $US6.9 billion in the 4th quarter after $US7.6 billion worth of purchases in the third quarter.
And Buffett said Berkshire has so far repurchased another $US1.2 billion of its stock so far this year.
“Today, internal opportunities deliver far better returns than acquisitions,” he wrote in letter.
Buffett explained in his annual letter to shareholders that he and Vice Chairman Charlie Munger have found little that “excites” them in terms of big acquisitions that was once their hallmark.
Instead, he said he and Munger increasingly find share repurchases as the best way to deploy cash at this time.
“Through that simple act, we increase your share of the many controlled and non-controlled businesses Berkshire owns,” Buffett wrote in the letter.
“When the price/value equation is right, this path is the easiest and most certain way for us to increase your wealth.”
Berkshire’s shares were a good investment – their price rose 29.6% in 2021, topping the 28.7% gain in the S&P 500 including dividends, and ending two years of significant underperformance relative to that index. They are also outperforming in so far this year 2022.
Berkshire shares are up more than 6.3% so far this year while the S&P 500 is down more than 8%.
The $US1.2 billion so far has no doubt helped a little just as the more than $US27 billion worth of buybacks helped that 2021 out performance.
Operating profit for 2021 (from the company’s vast range of more 90 businesses) rose 25% to a record $US27.46 billion, with more than one-third from the BNSF railroad and Berkshire Hathaway Energy despite COVID-19 supply chain disruptions. That topped the previous record $24.78 billion set in 2018.
Total revenue for 2021 was $US276.1 billion, up 12.6% from $US245.5 billion in 2020.
Fourth quarter quarterly operating income rose 45% to $US7.29 billion from $US5.02 billion a year earlier.
Fourth quarter net income rose 11% to $US39.65 billion from $US35.84 billion in the December, 2020 quarter. The accounts show that both quarterly figures reflected large gains from stocks such as Apple and totalled $US31.7 billion, as we forecast in mid-February.
Apple alone represents 46% of the $US350.7 billion of stocks that Berkshire owns.
The Apple stake was valued at $US161.2 billion at the end of December, more than five times the $US31.1 billion Berkshire paid for it.
…………
In his annual letter to Berkshire shareholders, 91-year-old Buffett again underlined his strong confidence in Berkshire, saying its emphasis on investing in strong businesses and stocks benefits investors with a similar long-term focus.
“People who are comfortable with their investments will, on average, achieve better results than those who are motivated by ever-changing headlines, chatter and promises,” Buffett wrote.
Noting generally the risks of changes in world politics, terrorism and cyberattacks, Buffett said Berkshire remains wary (and no doubt ready to use his $US146 billion cash float if he can spot a ‘bargain’).
Buffett pledged to keep more than $US30 billion on hand, after long saying $US20 billion was the minimum.
In his letter, Buffett touted what he called Berkshire’s “four giants” including its massive insurance operations, BNSF, Berkshire Hathaway Energy and the Apple stake.
“Our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO,” Buffett wrote.
Buffett pointed out in his letter that investors might be surprised at just how much Berkshire depends on the American industrial economy for its success. Berkshire also owns Duracell batteries, Benjamin Moore paints, homebuilder Clayton, a national real estate broking chain, a national chain of car dealers and flooring company Shaw, for example.
That’s a familiar refrain from previous letters
“Many people perceive Berkshire as a large and somewhat strange collection of financial assets. In truth, Berkshire owns and operates more US-based ‘infrastructure’ assets — classified on our balance sheet as property, plant and equipment — than are owned and operated by any other American corporation,” Buffett wrote.
Buffett also pointed out Berkshire Hathaway paid $3.3 billion in federal income taxes last year as well as “substantial state and foreign taxes.”
“‘I gave at the office’ is an unassailable assertion when made by Berkshire shareholders,” Buffett joked in his letter. He pointed out that Berkshire in effect pays the US Treasury around $US6 million a day.
Berkshire confirmed on Saturday it plans for the first time since 2019 to hold its usual shareholder weekend in Omaha, including the April 30 annual meeting.
Buffett announced after last year’s virtual shareholder meeting that Greg Abel, a long time senior executive who oversees the company’s non-insurance businesses, would succeed him as CEO of Berkshire.
But Buffett, who turns 92 in August, has said nothing about his own retirement plans.
…………
There is, however, one major deal already on the books that won’t happen for 12 months or so.
In 2017, Berkshire bought 38.6% of Pilot Corp (owners of Pilot Flying J), a leader in travel centres that had revenues last year of $US45 billion from more than 750 locations across the US. Berkshire paid $US2.786 billion for that stake.
Under the 2017 purchase agreement, Berkshire will purchase an additional interest in Pilot that will raise its ownership to 80% and lead to them fully consolidating Pilot’s earnings, assets and liabilities in our financial statements. (it is present equity accounted).
Berkshire still holds that 38.6% stake in the family-owned company, which was founded by James Haslam in 1958 and has more than 27,000 employees. The Haslam family currently holds a majority interest with 50.1 percent ownership.
Berkshire will become the majority shareholder of Pilot Flying J by acquiring an additional 41.4% equity stake for a total 80% stake in the company. The Haslam family will retain 20% ownership.
The value of that 41.4% stake hasn’t been revealed but will be more than $US3 billion.
