Berkshire, Buffett, Book Value and Buybacks

03/17/2020 5:00 am EST

Focus: FINANCIALS

Ingrid Hendershot

Founder and President, Hendershot Investments, Inc.

Berkshire Hathaway Class A (BRK.A) reported the company’s net worth during 2019 rose 22% with book value equal to $261,417 per Class A share as of 12/31/19, notes Ingrid Hendershot, value-oriented money manager and editor of Hendershot Investments.

During the year, Berkshire reported record net earnings of $81.4 billion compared to $4.0 billion in the prior year period.

New accounting rules in 2018 require Berkshire to include the changes in unrealized gains/losses of its stock investments in net income which resulted in a $57.4 billion gain in 2019 from investments and derivatives compared to a $17.7 billion loss in the prior year period.

Berkshire’s five major investment holdings represent 67% of total equities held, including American Express (AXP) at $18.9 billion, Apple (AAPL) at $73.7 billion, Bank of America (BAC) at $33.4 billion, Coca-Cola (KO) at $22.1 billion and Wells Fargo (WFC) at $18.6 billion. 

Berkshire’s operating revenues increased 2.6% in 2019 to $254 billion with growth in all business segments except BNSF railroad which remained relatively flat.

Operating earnings declined 3% during 2019 to $24 billion primarily due to lower insurance underwriting results. The float of the insurance operations approximated $129 billion as of 12/31/19, an increase of $6 billion during the year.

Berkshire’s balance sheet continues to reflect significant liquidity and a strong capital base of $424.8 billion as of 12/31/19, an increase of $76.1 billion since 2018, and unmatched in corporate America.

Excluding railroad, energy and utility investments, Berkshire ended the year with $409 billion in investments allocated approximately 60.6% to equities, 4.6% to fixed-income investments, 4.3% to equity method investments and 30.5% in cash and equivalents. Berkshire’s investments are heavily tilted toward equities, especially for an insurance company.

In the annual report, Buffett explains, “If something close to current rates should prevail over the coming decades and if corporate taxes also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments."

Buffett continues "Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater. But the combination of the American Tailwind and compounding wonders will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions."

Berkshire Hathaway’s financial strength allows Warrant Buffett to make significant investments and acquisitions, even though there was minimal activity during 2019.

In 2019, Berkshire closed on a deal to invest a total of $10 billion in Occidental Petroleum Preferred Stock with an 8% dividend. In addition, about $1.7 billion was invested in bolt-on acquisitions.

Free cash flow was relatively unchanged for the year at $22.7 billion. In 2019, capital expenditures increased 10% to $16 billion, including $11 billion in the capital intensive railroad, utilities and energy businesses.

Reinvestment in productive operational assets will remain the company’s top priority. During 2019, Berkshire sold or redeemed a net $17.6 million in Treasury Bills and fixed-income investments and bought a net $4.3 billion of equity securities.

Berkshire revised its buyback policy which now permits Berkshire to repurchase shares at prices below Berkshire’s intrinsic value, as conservatively determined by Warren Buffett and Charlie Munger. During 2019, Berkshire repurchased about $5 billion of its common stock, representing about one percent of the company.

These share repurchases included 953,070 Berkshire Hathaway Class B (BRK.B) an average price of $221.67 per share and 674 Class A shares at an average price of $333,298 per share during December 2019. We expect further share repurchases in 2020 as Berkshire Hathaway’s stock currently appears undervalued.

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