ii view: Berkshire Hathaway buys record amount of its own stock

Is Mr Buffett’s company the ultimate play on value investing? We assess prospects.

Fourth-quarter results to 31 December 2020

• Net earnings attributable to shareholders up 23% to $35.8 billion (£25.8 billion)
• Operating earnings up 13% to $5 billion (£3.6 billion)
• Cash of $138 billion (£99.4 billion)
• Shares buy-back of $9 billion - $24.7 billion (£17.8 billion) over the full year

ii round-up:

Warren Buffett's Berkshire Hathaway (NYSE:BRK.B) conglomerate purchased a record $24.7 billion (£17.8 billion) of its own shares during 2020 compared to around $5 billion (£3.6 billion) in 2019. 

Berkshire, which runs companies from insurance to railroad operations, delivered underlying fourth-quarter earnings excluding investment gains of $5 billion. That's up from $4.4 billion in the final quarter of 2019 and is aided by reduced losses for insurance underwriting following 2019 wildfires in both California and Australia.

Fourth-quarter profits including investment gains also grew, rising by over a fifth to $35.8 billion, as Berkshire took profits following gains in shares such as vaccine maker Pfizer (NYSE:PFE) and banking mammoth JPMorgan (NYSE:JPM). 

Berkshire shares are up by nearly 4% year-to-date compared to a gain of 1.5% for the S&P 500 index. Shares of Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA) are down around 5% over 2021. 

The Omaha Nebraska headquartered company, which operates over 90 businesses, purchased around $9 billion of its own shares during the fourth quarter. That's similar to its buyback during the prior third quarter but up from $5.1 billion in the second quarter. 

“In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse,” highlighted Mr Buffett in his annual letter to shareholders. 

Profit excluding gains or losses from share investments held, Mr Buffett’s preferred measure, fell by 9% to $21.9 billion over the year. Volumes carried by its railroad businesses suffered under pandemic lockdowns. As did its manufacturing businesses exposed to arenas such as aerospace. 

Earnings including investment gains or losses over 2020 fell by 48% to $42.5 billion. Berkshire shares are up by more than 45% since March induced pandemic lows back in 2020. 

Berkshire continues to hold significant cash at $138 billion.  

ii view:

Led by legendary investor and businessman Warren Buffett, Berkshire Hathaway is tracked and invested in by large and small investors alike. A conglomerate of different businesses and investments acquired under the watchful eye of Buffett, Berkshire as an American company offers investors a near one-stop investment destination.  

For investors, a near 14% underperformance compared to the S&P 500 index over 2020, added to an 18% underperformance over the course of 2019, suggests thinning investor patience with Berkshire’s inability to find a home to invest its cash mountain.  

That said, Buffett clearly sees value in his own Berkshire Hathaway shares. A significant jump in the value of buybacks over 2020 from 2019 has helped put some of its cash to work. Investments made over 2020, including holdings in Japanese trading companies such as Mitsubishi Corporation, Bank of America (NYSE:BAC) and recent US IPO Snowflake (NYSE:SNOW), suggest opportunities continue to be found, but none that justify a major acquisition. In all, and with distorting central bank action still arguably very much in play on asset prices, the judgement and experience offered by Berkshire remains highly reassuring.   

Positives: 

• Diverse portfolio of industries and businesses
• Company Chairman Warren Buffett is regarded by many as a legendary investor and businessman 

Negatives:

• Subject to macro-economic and geopolitical uncertainties
• Management succession risk - Mr Buffett recently turned 90

The average rating of stock market analysts:

Strong hold