By Jenna Telesca and Geoffrey Rogow
Warren Buffett's Berkshire Hathaway Inc. posted an increased
fourth-quarter profit Saturday, with the billionaire investor using
his annual missive to investors to explain a recent surge in stock
buybacks.
For the year, Berkshire bought back nearly $25 billion in
shares, according to the company's earnings report. Before the last
few years, Mr. Buffett had refused to buy back any Berkshire
stock.
In Mr. Buffett's annual letter to shareholders, he defended the
larger-than-usual buybacks, saying they enhance the intrinsic value
for shareholders but still leave Berkshire ample funds for any
opportunities. He was less than complimentary of other chief
executives buying back stock.
"American CEOs have an embarrassing record of devoting more
company funds to repurchases when prices have risen than when they
have tanked," he wrote.
Berkshire's available cash and short-term Treasury bonds were
$138.3 billion in the fourth quarter. Investors have been watching
for over a year to see if Mr. Buffett would buy a significant stake
in a large company as he has in other turbulent times for the U.S.
economy.
The conglomerate's restraint in investing available cash has
been in contrast to Wall Street's flurry of new initial public
offerings, deals and move by special purpose acquisition
companies.
While Berkshire has made some smaller investments over the last
year -- most recently investing $8.6 billion in Verizon
Communications Inc. and $4.1 billion in Chevron Corp. -- the
investments haven't made a large dent in the conglomerate's
available cash. And Berkshire hasn't bought a majority stake in a
major business.
Bill Smead, chief investment officer of Smead Capital, said he
was disappointed that Mr. Buffett didn't explain more on why
Berkshire is holding on to its cash when other investors
aren't.
"The partners need to know not only what he's doing but why he's
not doing what he's not doing and give some historical background
to some of the goofy stuff that's been going on," Mr. Smead said,
referring to Wall Street's hot investment market.
Berkshire's net earnings rose on the back of a soaring stock
market to $35.8 billion, or $23,015 a Class A share equivalent, up
almost 23% from the year-before's profit of $29.2 billion, or
$17,909 a share.
An accounting-rule change in recent years has meant that
Berkshire's earnings often reflect the larger performance of the
stock market.
Operating earnings, which exclude some investment results, rose
to $5 billion from $4.4 billion the year prior. Mr. Buffett has
said operating earnings better reflect Berkshire's performance than
net earnings that incorporate unrealized investment gains or
losses.
Berkshire runs a large insurance operation as well as railroad
holdings, utilities, industrial manufacturers, retailers and even
auto dealerships. It also holds large investments, especially in
the stock market.
Ninety-year-old Mr. Buffett has built his sprawling Omaha, Neb.,
conglomerate as a vehicle for investors interested in long-term
gains. As such, Berkshire operates a variety of different
businesses that Mr. Buffett thinks will stand the test of time. The
company also invests the "float" from the premiums its insurance
customers pay.
In his letter, Mr. Buffett was particularly critical of those
who have increasingly turned to riskier investments thanks to
record-low interest rates. This practice, he argues, will be a
mistake.
"Some insurers, as well as other bond investors, may try to
juice the pathetic returns now available by shifting their
purchases to obligations backed by shaky borrowers. Risky loans,
however, aren't the answer to inadequate interest rates. Three
decades ago, the once-mighty savings and loan industry destroyed
itself, partly by ignoring that maxim," he said.
Mr. Buffett also addressed a black mark on Berkshire's bottom
line, exposed in part by the economic impact of the pandemic. In
2020, the firm took an $11 billion write-down related to the
company's purchase of Precision Castparts in 2016.
"I paid too much for the company. No one misled me in any way --
I was simply too optimistic about PCC's normalized profit
potential. Last year, my miscalculation was laid bare by adverse
developments throughout the aerospace industry, PCC's most
important source of customers," said Mr. Buffett in his letter.
Mr. Buffett did surprise investors with one note.
He said that Berkshire's annual meeting in May won't be held as
normal in Omaha. Instead, it will be held in Los Angeles, where
investors will be able to ask questions of him, as well as Vice
Chairmen Charlie Munger, Ajit Jain and Greg Abel. Last year, thanks
to the pandemic, Mr. Buffett's 97-year-old business partner, Mr.
Munger, wasn't able to attend.
With Messers. Buffett and Munger in their 90s, some investors
are curious to learn more about the strengths of the next
generation of Berkshire's leaders. Mr. Abel joined Mr. Buffett on
stage at last year's annual meeting.
Despite the rising profit, Berkshire's stock performance fell
short of the broader market for a second year running. The S&P
500 index increased by 16.3% for the year ended Dec. 31 while
Berkshire's stock increased 2.4%. Berkshire's stock also lagged
behind the index in 2019.
Berkshire's Class A shares closed Friday at $364,580.01, down
0.9% for the day.
Write to Geoffrey Rogow at geoffrey.rogow@wsj.com
(END) Dow Jones Newswires
February 27, 2021 11:32 ET (16:32 GMT)
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