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Berkshire Hathaway Letter to Shareholders

Warren Buffett, Chairman and CEO of Berkshire Hathaway, in his letter to shareholders, stated that Berkshire earned $81.4 billion in 2019 according to generally accepted accounting principles (commonly called “GAAP”). The components of that figure are $24 billion of operating earnings, $3.7 billion of realized capital gains and a $53.7 billion gain from an increase in the amount of net unrealized capital gains that exist in the stocks we hold. Each of those components of earnings is stated on an after-tax basis. Ingrid Hendershot, President of Hendershot Investments posted the following highlights at

Berkshire Hathaway (BRKB) reported the company’s net worth during 2019 rose 22% with book value equal to $261,417 per Class A share as of 12/31/19.

During the year, Berkshire reported net earnings of $81.4 billion compared to $4.0 billion in the prior year period. New accounting rules in 2018 require Berkshire to include the changes in unrealized gains/losses of its equity security investments in net income instead of comprehensive income which resulted in a $57.4 billion gain in 2019 from investments and derivatives compared to a $17.7 billion loss in the prior year period.

Berkshire’s five major investment holdings represent 67% of total equities, including American Express at $18.9 billion (up 30% during 2019 or $4.4 billion), Apple at $73.7 billion (up 82% during 2019 or $33.4 billion), Bank of America at $33.4 billion (up 48% during 2019 or $10.8 billion), Coca-Cola at $22.1 billion (up 17% during 2019 or $3.2 billion) and Wells Fargo at $18.6 billion (down 10% or $2.1 billion).

Berkshire’s operating revenues increased 2.6% in 2019 to $254 billion with growth in all business segments except BNSF which remained relatively flat. Operating earnings declined 3% during 2019 to $24 billion due primarily to lower insurance underwriting as earnings from primary insurance operations were lower in 2019 and losses from reinsurance were higher than in 2018.

During 2019, Berkshire’s operating earnings in the insurance underwriting operations dropped to $325 million compared to $1.6 billion in the prior year. On the other hand, insurance investment income was 21% higher at $5.5 billion during the year, reflecting higher interest rates on short-term investments and higher dividend income due to increases in the portfolio of equity securities, including the August 8, 2019 investment in Occidental 8% preferred stock, and higher dividend rates. The float of the insurance operations approximated $129 billion as of 12/31/19, an increase of $6 billion during the year. The average cost of float was negative during the year as the underwriting operations generated pre-tax earnings of $400 million.

Berkshire’s insurance operations have had an excellent underwriting record generating underwriting profits in 16 of the last 17 years with the cumulative pre-tax gain in the 17-year period totaling $27.5 billion.

Burlington Northern Santa Fe’s (BNSF) revenues declined 1% during 2019 to $23.5 billion with net earnings chugging 5% higher to $5.5 billion thanks to higher rates per car/unit and ongoing cost controls. Aggregate volume was 10.2 million cars/units, representing a 4.5% decrease in volume from last year.

BNSF experienced severe winter weather and flooding on parts of its network in the first half of 2019, which negatively affected revenues, expenses and service levels. Reduced consumer demand, trade policy, higher available truck capacity and lower international intermodal market share also impacted volume.

Berkshire Hathaway Energy reported revenues increased slightly to $20 billion during 2019 due to growth at the real estate brokerage unit that was mostly offset by lower revenue of the energy units. Net earnings increased 8% during the year to $2.8 billion with all business segments contributing to the earnings growth.

Berkshire’s Manufacturing businesses reported a 1% increase in revenue growth in 2019 to $62.7 billion with operating earnings up 2% to $9.5 billion. Revenue and earnings growth were led by Building Products with 9% revenue growth to $20.3 billion and 13% growth in operating earnings to $2.6 billion, thanks to 22% growth at Clayton Homes, reflecting increased home sales and changes in sales mix. Industrial Products revenues were relatively unchanged at $30.6 billion with Consumer Products revenues declining 6% to $11.8 billion primarily due to a 13% decline in Forest River unit sales.

Service and Retailing revenues rose 1% during the year to $80.0 billion with pre-tax earnings down 3% to $2.8 billion. Revenues rose modestly in all business segments with earnings down 8% in the Service segment due to lower earnings from FlightSafety and TTI. FlightSafety experienced significant losses on a government contract in the fourth quarter. TTI was challenged by lower gross margin, higher operating expenses and foreign exchange headwinds. The decline in Service earnings was partly offset by growth in operating earnings in the Retailing and McLane segments.

Berkshire’s balance sheet continues to reflect significant liquidity and a strong capital base of $424.8 billion as of 12/31/19, an increase of $76.1 billion since last year, and unmatched in corporate America. Excluding railroad, energy and utility investments, Berkshire ended the year with $409 billion in investments allocated approximately 60.6% to equities ($248 billion), 4.6% to fixed-income investments ($18.7 billion), 4.3% to equity method investments ($17.5 billion), sand 30.5% in cash and equivalents ($125 billion).

Tilted Towards Equities

Berkshire’s investments are heavily tilted toward equities, especially for an insurance company. In the annual report, Warren Buffett explains, “If something close to current rates should prevail over the coming decades and if corporate taxes 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.

Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater. But the combination of the American Tailwind and compounding wonders will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions.”

Berkshire’s financial strength allows Buffett to make significant investments and acquisitions, although there was minimal activity during 2019. During the year, Berkshire closed on the deal to invest a total of $10 billion in Occidental Petroleum in connection with Occidental’s proposal to acquire Anadarko Petroleum.

Berkshire’s investment includes newly issued Occidental Cumulative Perpetual Preferred Stock with an aggregate liquidation value of $10 billion, together with warrants to purchase up to 80 million shares of Occidental common stock at an exercise price of $62.50 per share.

The preferred stock will accrue dividends at 8% per annum and will be redeemable at the option of Occidental commencing on the tenth anniversary of issuance. In addition, about $1.7 billion was invested in bolt-on acquisitions. Free cash flow was relatively unchanged for the year at $22.7 billion. During 2019, capital expenditures increased 10% to $16 billion, including $11 billion in the capital-intensive railroad, utilities and energy businesses. Berkshire expects additional capital expenditures to approximate $10.6 billion for BNSF and Berkshire Hathaway Energy in 2020.

Reinvestment in productive operational assets will remain the company’s top priority. During 2019, Berkshire sold or redeemed a net $17.6 million in Treasury Bills and fixed-income investments and bought a net $4.3 billion of equity securities.

Buyback Policy

Berkshire revised its buyback policy which now permits Berkshire to repurchase shares at prices below Berkshire’s intrinsic value, as conservatively determined by Warren Buffett and Charlie Munger. During 2019, Berkshire repurchased about $5 billion of its common stock, representing about 1% of the company. These repurchases included 953,070 Class B shares at an average price of $221.67 and 674 Class A shares at an average price of $333,298 per share during December 2019. We would expect further share repurchases given Berkshire’s current attractive valuation.

In an interview subsequent to the release of the annual report, Buffett acknowledged that it is difficult to repurchase Berkshire shares since there are so many long-term shareholders unwilling to part with their shares. Buffett has offered anyone with a $20 million or more block of Berkshire and inclined to sell it to call Berkshire.

Coronavirus Impact

In the same interview, Buffett was asked about the impact of the coronavirus on Berkshire’s businesses. Many of the roughly 1,000 Dairy Queens in China are closed, while those that are open "aren't doing any business to speak of," Buffett said, while Johns Manville insulation and Shaw carpeting have seen supply chain disruptions. In addition, his 5.6% holding in Apple and significant investment holdings in the airline stocks also are feeling the negative impact of the virus. However, Buffett noted that he buys businesses to hold for 20-30 years, and his positive outlook for these businesses has not changed due to the coronavirus. Buffett concluded that the coronavirus is “scary stuff” but it won’t cause him to sell any stocks. If stock market prices drop, it makes valuations appear more attractive, and Buffett is eager to buy more stocks and businesses with his $125 billion in cash.

Read the Berkshire Hathaway Shareholder Letter

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