Berkshire bought back $ 9 billion of its shares in the fourth quarter

In his annual shareholder letter, CEO Warren Buffett noted that Berkshire (ticker: BRK.A, BRK.B) had repurchased 5.2% of its shares in 2020.

“Last year, we demonstrated our enthusiasm for Berkshire’s diversification of properties by buying back the equivalent of 80,998 ‘A’ shares, spending $ 24.7 billion. That action increased your ownership by 5.2% across all Berkshire businesses without even touching your wallet, ”Buffett wrote.

“Next criteria [Vice Chairman Charlie Munger] and I have long recommended it, we made those purchases because we thought they would both increase the net asset value per share for continuing shareholders and leave Berkshire with more than enough resources for any opportunities or problems it might encounter. “

Buybacks appeared to be continuing at a rapid pace in the current quarter, with Berkshire buying back more than $ 4 billion worth of stock by mid-February, based on our analysis using the number of shares reported in the annual report.

Berkshire ended 2020 with enough cash and equivalents of $ 138 billion, up from $ 128 billion at the end of 2019, but down about $ 145 billion on September 30.

Buyback activity could encourage investors on Monday as the significant buybacks in the fourth quarter indicated that Buffett considered the stock attractive in the fourth quarter, even as it rose in value by about 10%.

Berkshire’s Class A stock, which ended Friday at $ 364,580, is up 4.7% so far in 2021. The Class B stock, which is up 3.7% this year, ended Friday at $ 240.51.

Buffett said Berkshire will be judicious when it comes to buying back shares. “We do not believe in any way that Berkshire shares should be bought back at any price,” he wrote. “I emphasize that point because US CEOs have an embarrassing track record of spending more company resources on buybacks when prices have gone up than when they have been fueled. Our approach is exactly the opposite. “

The ongoing share buybacks so far in 2021 indicate that Buffett views the stock as an attractive trade at less than 1.3 times the end-2020 book value of $ 287,000 per Class A share. That’s below the average of about 1.4 times book value over the past five years. Financial data in the annual report also pointed to missed investment opportunities in 2020 as Berkshire failed to capitalize on the market turmoil at the beginning of the year.

Berkshire was a net seller of more than $ 8 billion in stock in 2020 as it acquired airline commercial properties and some financial stocks, including

JPMorgan Chase

(JPM) and

Goldman Sachs Group

(GS). Buffett continued to find few companies to buy as Berkshire spent about $ 2 billion on acquisitions, primarily related to the purchase of gas pipeline assets from

Dominion Energy

(D). What Buffett calls an elephant-sized deal remains elusive.

Berkshire’s fourth quarter operating profit increased 19% to approximately $ 3,224 per Class A share, driven by gains in the company’s rail, utility and energy businesses and reduced underwriting losses. Total operating profit increased 14% to $ 5 billion over the period.

Total profit in the quarter was huge at $ 35.9 billion, a reflection of $ 30 billion in investment gains, driven by paper gains in the company’s equity portfolio, which totaled $ 281 billion at the end of the year. Fourth quarter earnings were 23% higher than the same period in 2019, when Berkshire also benefited from the strength of the stock market.

For the year, Berkshire’s operating profit declined 9% to $ 21.9 billion. Buffett commented on the performance in the annual letter.

“Operating income counts the most, even during periods when they are not the largest item in our GAAP total,” he wrote. “Our focus at Berkshire is both increasing this portion of our income and acquiring large and conveniently located businesses. Last year, however, we failed to achieve either goal: Berkshire made no substantial acquisitions and operating income was down 9%. However, we have increased Berkshire’s net asset value per share by retaining earnings as well as buying back approximately 5% of our shares. “

Buffett tells investors to focus on bottom line because the paper portfolio gains that run through the income statement are one-time events with no predictive value.

Investors don’t usually focus much on quarterly fluctuations in Berkshire earnings, but choose to follow long-term trends.

Buffett wrote in the letter that Berkshire has four “jewels” among its many assets and businesses. It’s the massive property and casualty insurance policies run by Berkshire veteran Ajit Jain; rail operator Burlington Northern Santa Fe; Berkshire Hathaway Energy, primarily an electric utility of which Berkshire owns 91%; and a 5.4% interest in

Apple

(AAPL).

Burlington Northern, the largest of the U.S. railroads by freight volume, is likely worth a similar amount to its closest rival,

Union Pacific

(UNP). Berkshire Hathaway Energy is likely worth $ 50 billion or more based on last year’s profit of $ 3.4 billion and the price at which the company bought stock from insiders. Union Pacific has a market value of $ 138 billion.

Berkshire owned 908 million Apple shares worth $ 120 billion at the end of 2020. Berkshire’s current market value is approximately $ 565 billion.

Buffett contrasted the equity-heavy investments of its insurance divisions, enabled by the company’s financial strength, against the bond-laden portfolio of rivals.

[B]onds are not the place to be these days. Can you believe that the income recently available from a 10-year US Treasury bond – yield was 0.93% at the end of the year – had fallen 94% from the 15.8% available in September 1981 ? In some large and important countries, such as Germany and Japan, investors earn negative returns on trillions of dollars in government debt. Fixed income investors around the world – be it pension funds, insurance companies or retirees – face a bleak future. “

Buffett acknowledged that Berkshire had overpaid for the 2016 purchase of Precision Castparts, an aircraft parts manufacturer badly hit by the downturn in the space industry, for about $ 33 billion.

Berkshire wrote off $ 11 billion in assets in 2020, almost all of which is attributable to Precision Castparts.

“I paid too much for the company. Nobody misled me in any way – I was just too optimistic about PCC’s normalized earnings potential. Last year, my calculation error was exposed by unfavorable developments in the aerospace industry, the main source of PCC’s customers, ”Buffett wrote.

Precision Castparts is Berkshire’s largest acquisition in the past 10 years. In its annual report, Berkshire said the unit’s revenues were down 29% to $ 7.3 billion in 2020, while pre-tax profit fell 64.5% to $ 650 million. The company has reduced its global workforce by 40%.

“PCC has taken aggressive restructuring measures to change the size of its operations in response to the reduced expected volumes in the aerospace markets,” said Berkshire.

Buffett noted that Berkshire’s annual meeting on May 1 will be a virtual affair, just like last year, and will take place in Los Angeles, the home of Vice Chairman Munger. The meeting – a Woodstock for capitalists, as Buffett calls it – is normally held in Berkshire’s hometown of Omaha, Neb.

Buffett wrote that he is pleased that Munger will share the stage with him to answer questions from shareholders in the field, and that Berkshire Vice Chairs Greg Abel and Ajit Jain will be available to answer questions about their activities. Abel oversees Berkshire and Jain’s non-insurance operations, the insurance empire.

“And now – drum roll, please – a surprise,” Buffett wrote. “This year our meeting will be in Los Angeles… and Charlie will be onstage with me to provide answers and observations during the 31⁄2 hour question period. I missed him last year and, most importantly, you clearly missed him. “

This could be one of the last encounters that the legendary couple will share the stage, with Buffett now 90 and Munger 97.

Buffett did not discuss the succession of the CEO in the letter, but continued his practice. Barron’s and many other observers have speculated that Abel will succeed Buffett as CEO.

Write to Andrew Bary at [email protected]