Home News Five key takeaways from Warren Buffett's annual letter and Berkshire Hathaway earnings

Five key takeaways from Warren Buffett's annual letter and Berkshire Hathaway earnings

by SuperiorInvest

Berkshire Hathaway's (BRK.A, BRK.B) cash pile rose to a record in the fourth quarter of 2023, while profits soared despite weakness in its rail and energy businesses, according to its earnings report of Saturday.

This was Berkshire's first quarterly report since Vice Chairman Charlie Munger, 99, died in November. Buffett led his long-awaited letter to shareholders with a tribute to his right-hand man, calling him “The Architect of Berkshire Hathaway.”

Berkshire's class A and B shares closed at a record high on Friday, up nearly 17% and 15%, respectively, this year.

Berkshire's cash pile hits record and profits soar

Berkshire reported full-year net income of $96.2 billion compared with a loss of $22.8 billion for 2022. But Buffett is loathe to report the figure (he called it “worse than useless” in his letter to shareholders) because it includes unrealized profits. and losses, which can exceed $5 billion a day, on Berkshire's huge stock portfolio.

Instead, Buffett prefers operating profits, which rose to $8.5 billion in the fourth quarter of 2023 from $6.6 billion a year earlier. Full-year operating profit was $37.4 billion, an increase of 21% from 2022.

Berkshire's cash and US Treasury holdings rose to a record $167.6 billion at the end of 2023, with $133.4 billion in Treasuries. In the third quarter, the company's cumulative cash amounted to $157.2 billion.

Buffett called cash and Treasury holdings “far in excess of what conventional wisdom considers necessary” but extolled the benefits of Berkshire's conservatism. He noted that during the 2008 financial crisis, Berkshire did not rely on commercial paper, bank lines or debt markets.

Is the era of dazzling performances over?

Berkshire is “very reluctant” to issue new shares and that makes it almost impossible for the company to double its current size in the next five years.

Investors are keeping a close eye on Berkshire's cash reserves in anticipation of the company's next big bet.

However, Buffett said it is becoming increasingly difficult to find investment opportunities that fit Berkshire's requirements. Within the United States “there are only a handful of companies left in this country capable of really moving the needle in Berkshire” and “there are basically no candidates that are significant options” in other parts of the world.

As Buffett says: “All in all, we have no chance of achieving an amazing performance.”

Berkshire in Occidental, Japan for the long term

Berkshire's most recent 13-F filing showed it added to its existing holdings of Occidental Petroleum (OXY), which Buffett said the company plans to hold “indefinitely.”

At the end of 2023, the company owned 27.8% of Occidental Petroleum's common shares and the warrants gave them the option to increase their stake at a fixed price. Berkshire, however, has no intention of controlling or owning Occidental directly.

“We especially like its vast oil and gas reserves in the United States, as well as its leadership in carbon capture initiatives, although the economic viability of this technique has not yet been demonstrated,” Buffett said.

Buffett also praised the five Japanese companies that Berkshire increased its bets on last year: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. They have pursued shareholder-friendly policies, including prudent stock buybacks, modest dividend distributions, and conservative CEO compensation packages.

“An additional benefit for Berkshire is the possibility that our investment could provide us with opportunities to partner around the world with five large, well-managed and respected companies,” Buffett said.

Berkshire owns about 9% of each company and has agreed with all of them that it will not buy enough shares to raise its stake above 9.9%.

Public services and railways disappoint

Buffett called Berkshire Hathaway Energy's earnings, which fell 40% to $2.3 billion in 2023, a “severe” disappointment.

The company blamed the regulatory climate in some states for raising “the specter of zero profitability or even bankruptcy.” Losses from wildfires have added to the industry's woes.

“It is difficult to project both earnings and asset values ​​in what was once considered one of America's most stable industries,” Buffett wrote. “When the dust settles, America's energy needs and resulting capital spending will be staggering. I did not anticipate or even consider the adverse developments in regulatory yields and, along with Berkshire's two partners in BHE, made a costly mistake by not to do it.”

BNSF Railway was also disappointing. Operating profit fell 14% to $5.1 billion as revenue declined and pay increases exceeded expectations.

However, Buffett was more optimistic about the future of the railroad. He projected that they will improve BNSF's profit margins, which have declined since the Berkshire acquisition in 2010. “Railroads are essential to America's economic future,” he wrote. “A century from now, BNSF will still be an important asset to the country and to Berkshire. You can count on it.”

Insurance boosts profits

Berkshire's insurance business “performed exceptionally well last year, setting records in sales, float and underwriting earnings.”

Insurance investment income rose more than 47% to $9.6 billion in 2023, while the underwriting business swung from a loss of $30 million in 2022 to a profit of $5.4 billion in 2023.

This is not surprising given rising insurance costs. In August, auto insurance costs rose more than 19%, the fastest pace since 1976, driven by more expensive cars and the rising costs of repairing them. Frequent natural disasters have also driven up home insurance premiums.

Other insurers, such as The Travelers Companies (TRV) and Allstate (ALL), have also reported an increase in profits due to higher premiums.

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