Berkshire repurchased $ 9 billion of its shares in the fourth quarter

In his annual letter to shareholders, 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 the distribution of Berkshire properties by repurchasing the equivalent of 80,998 ‘A’ shares, spending $ 24.7 billion. This action increased your stake in all of the Berkshire companies by 5.2% without forcing you to touch your portfolio, ”Buffett wrote.

“According to the criteria [Vice Chairman Charlie Munger] and I have long recommended we made these purchases because we believed they would both improve intrinsic value per share for permanent shareholders and leave Berkshire with more than enough funds for any opportunities or problems that it might meet.

Buybacks appear to continue at a steady pace in the current quarter, with Berkshire having repurchased more than $ 4 billion of shares through mid-February, based on our analysis using the number of shares disclosed in the annual report.

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

The buyback activity could cheer investors on Monday as the large fourth quarter buyout indicated that Buffett viewed the stock as attractive in the fourth quarter, even though it appreciated by around 10%.

Class A shares of Berkshire, which closed Friday at $ 364,580, are up 4.7% so far in 2021. Class B shares, which are up 3.7% this year, finished Friday at $ 240.51.

Buffett said Berkshire would be wise in its share buybacks. “Under no circumstances do we believe that Berkshire shares should be repurchased at any price,” he wrote. “I emphasize this point because US CEOs have an embarrassing track record of spending more company funds on buyouts when prices have risen than when they have fallen. Our approach is exactly the opposite. “

The continued share buybacks so far in 2021 indicate that Buffett considers the stock attractive for less than 1.3 times its 2020 year-end book value of $ 287,000 per Class A share. below an average of about 1.4 times the book value over the past five years. Financial data from the annual report also highlighted missed investment opportunities in 2020 as Berkshire failed to capitalize on market turmoil earlier in the year.

Berkshire was a net seller of more than $ 8 billion of shares in 2020 by liquidating airline assets and certain financial stocks, including

JPMorgan Chase

(JPM) and

Goldman Sachs Group

(GS). Buffett continued to find few companies to buy, with Berkshire spending around $ 2 billion on acquisitions mostly related to its purchase of pipeline assets from

Dominion Energy

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

Berkshire’s fourth quarter operating profits rose 19% to about $ 3,224 per Class A share on gains from the company’s rail, utilities and energy businesses and reduction in underwriting losses insurance. Total operating profits increased 14% to $ 5 billion during the period.

Total earnings for the quarter were huge at $ 35.9 billion, reflecting $ 30 billion in investment gains driven by paper profits in the company’s stock portfolio which totaled $ 281 billion at the end of the year. Fourth quarter profits were up 23% compared to the same period in 2019, when Berkshire also benefited from the strength in the stock market.

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

“Operating profits are what matters most, even during times when they are not the most important part of our GAAP total,” he wrote. “Our goal at Berkshire is both to grow this segment of our revenue and to acquire large, well-positioned companies. Last year, however, we fell short of any targets: Berkshire made no significant acquisitions and operating profit fell 9%. We did, however, increase the intrinsic value per share of Berkshire by retaining earnings and repurchasing approximately 5% of our shares. “

Buffett asks investors to focus on operating profit, as the paper gains in the stock portfolio that cross the income statement are one-time events with no predictive value.

Investors tend not to focus much on quarterly fluctuations in Berkshire earnings, choosing instead to follow long-term trends.

Buffett wrote in the letter that Berkshire has four “gems” among its many assets and businesses. These are its massive property and casualty insurance operations run by Berkshire veteran Ajit Jain; the Burlington Northern Santa Fe rail operator; Berkshire Hathaway Energy, primarily an electric utility company in which Berkshire holds 91%; and a 5.4% stake in

Apple

(AAPL).

Burlington Northern, the largest of the US railways in terms of freight volume, is probably worth a similar amount to its closest rival,

Pacific Union

(UNP). Berkshire Hathaway Energy is probably worth $ 50 billion or more based on its $ 3.4 billion revenue last year and the price at which the company bought shares 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 around $ 565 billion.

Buffett compared the heavy investments in equities of its insurance units made possible by the financial strength of the company to the bond portfolio of its competitors.

“[B]waves are not the ideal place these days. Can you believe that the recently disposable income on a 10-year U.S. Treasury bill – the yield was 0.93% at the end of the year – had fallen 94% from the 15.8% yield? available in September 1981? In some big and important countries, like Germany and Japan, investors are getting negative returns on trillions of dollars of sovereign debt. Fixed income investors around the world – whether they are pension funds, insurance companies, or retirees – have a bleak future. “

Buffett admitted that Berkshire overpaid for its 2016 purchase of Precision Castparts, an aircraft parts maker that has been hit hard by the aerospace downturn, for around $ 33 billion.

Berkshire took $ 11 billion in asset write-downs in 2020, almost all of it attributable to Precision Castparts.

“I have paid too much for the business. No one misled me – I was just too optimistic about PCC’s normalized profit potential. Last year my miscalculation was exposed by unfavorable developments in the aerospace industry, PCC’s largest source of customers, ”Buffett wrote.

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

“PCC has taken aggressive restructuring steps to resize its operations in response to reduced volumes expected in the aerospace markets,” said Berkshire.

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

Buffett wrote that he was delighted that Munger shared the stage with him to answer questions from shareholders, and that Berkshire vice-presidents Greg Abel and Ajit Jain will be available to answer questions about their operations. Abel oversees the non-insurance activities of Berkshire and Jain, the insurance empire.

“And now – drum roll, please – a surprise,” Buffett wrote. “This year our reunion will be in Los Angeles… and Charlie will be on stage with me offering answers and comments throughout the 3.5 hour question period. I missed him last year and more importantly you clearly missed him.

It could be one of the last encounters the legendary duo share the stage, with Buffett now 90 and Munger 97.

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

Write to Andrew Bary at [email protected]