Behind The Big Numbers, Berkshire Stock Underperforms

By Glenn Dyer | More Articles by Glenn Dyer

As expected, Warren Buffett’s Berkshire Hathaway posted record full-year earnings of $US81.42 billion for 2019, almost twice the previous high of $US44.94 billion in 2017, a result that was boosted by unrealised gains from its stock investments such as Apple.

While Berkshire’s operating profit for the year, fell 3% to $US23.97 billion, the company’s huge investment portfolio jumped sharply in value as Wall Street enjoyed a banner year in 2019.

That saw Berkshire’s total profit including gains soar by an extra $US53.7 billion against a sharp fall the year before.

For the three months to December, Berkshire Hathaway reported a 23% fall in quarterly operating profit to $US4.42 billion, from $US5.72 billion in the final three months of 2018.

Including the jump in share prices in the December quarter, net income totalled $US29.16 billion, compared with a net loss of $25.39 billion a year earlier.

The record net profit is largely the result of an accounting rule that Buffett continues to urge investors to ignore, requiring Berkshire to report paper gains and losses from its stock holdings with net income.

That’s best shown by Apple’s share price in 2019 which soared 86% in 2019 and 31% in the fourth quarter alone, leaving Berkshire with a 5.7% stake in the tech giant worth $US73.7 billion at year’s end. That’s risen by another 6.6% so far in 2020.

Nonetheless, while Berkshire’s BNSF railroad and Berkshire Hathaway Energy units showed improvement in 2019, reinsurance operations weighed on operating results, and the Geico car insurer posted “subpar performance” as loss claims exceeded premium growth.

The reinsurers owned by Berkshire also another year of higher than normal claims, but nowhere as high as in 2018 (when two hurricanes caused billions of dollars damage in the US).

Berkshire did not write down its 26.6% stake in Kraft Heinz Co, which is struggling to rebound from years of cost-cutting amid changing consumer tastes, though its market value is well below the $US13.8 billion carrying cost on Berkshire’s balance sheet.

Buffett pointed out that the market value of Berkshire’s stake was $US10.5 billion at the end of December, but the pressure on Berkshire to impair the value of the stake is rising because Kraft Heinz shares have fallen another 15% so far in 2020 while the S&P 500 is up 3.3%.

Buffett said in his annual letter to shareholders that while he still prefers buying whole companies, stocks are a better bet than low-yielding bonds.

He attributed that in part to the “American Tailwind,” or the economy’s ability to grow despite roadblocks such as war, high inflation, and financial panic.

“If something close to current rates should prevail over the coming decades and if corporate tax rates 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,” he wrote in the letter.

Berkshire ended the year with a $US128 billion cash hoard, after repurchasing $US2.2 billion of stock in the fourth quarter and $US5 billion in for all of 2019.

As we pointed out in January, Berkshire’s underperformed the market in 2019, rising by just under 11%, compared with a 31.5% total return in the S&P 500, including dividends. That was Berkshire’s biggest underperformance since 2009.

Buffett said in his letter that at the Berkshire annual meeting in early May, shareholders will be able to ask questions of Ajit Jain and Greg Abel, the two Berkshire vice chairmen who are leading contenders to succeed Buffett as CEO.

This is a change from previous meetings when any comments by Berkshire leaders besides Buffett and Munger have been rare.

Berkshire’s Class A shares closed last Friday at $US343,499, up 1.1% for the year while the S&P 500 is up 3.3%.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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