By Jenna Telesca and Geoffrey Rogow
Berkshire Hathaway Inc.'s fourth-quarter profits rose on the
back of a soaring stock market.
Berkshire's net earnings rose to $35.8 billion, or $23,015 a
Class A share equivalent, up almost 23% from the year before's
profit of $29.2 billion, or $17,909 a share.
Operating earnings, which exclude some investment results, rose
to $5 billion from $4.4 billion the year prior. Billionaire
investor Warren Buffett has said operating earnings better reflect
Berkshire's performance than net earnings that incorporate
unrealized investment gains or losses.
Berkshire runs a large insurance operation as well as railroad
holdings, utilities, industrial manufacturers, retailers and even
auto dealerships. It also holds large investments, especially in
the stock market.
An accounting-rule change in recent years has meant that
Berkshire's earnings often reflect the larger performance of the
stock market.
Ninety-year-old Mr. Buffett has built his sprawling Omaha, Neb.,
conglomerate as a vehicle for investors interested in long-term
gains. As such, Berkshire operates a variety of different
businesses that Mr. Buffett thinks will stand the test of time. The
company also invests the "float" from the premiums its insurance
customers pay.
Also released Saturday was Mr. Buffett's annual letter to
shareholders. In the letter, Mr. Buffett discussed myriad topics,
including the company's history, investor-base and Berkshire's
decision to largely hold off on large purchases in the past
year.
He was particularly critical of those who have increasingly
turned to riskier investments thanks to record-low interest rates.
This practice, he argues, will be a mistake.
"Some insurers, as well as other bond investors, may try to
juice the pathetic returns now available by shifting their
purchases to obligations backed by shaky borrowers. Risky loans,
however, are not the answer to inadequate interest rates. Three
decades ago, the once-mighty savings and loan industry destroyed
itself, partly by ignoring that maxim," he said.
While Berkshire has made some smaller investments over the last
year -- most recently investing $8.6 billion in Verizon
Communications Inc. and $4.1 billion in Chevron Corp. -- the
investments haven't made a large dent in the conglomerate's
available cash. And Berkshire hasn't bought a majority stake in a
major business.
Berkshire's available cash and short-term Treasury bonds were
$138.3 billion in the fourth quarter. Investors have been watching
for over a year to see if Mr. Buffett would buy a significant stake
in a large company as he has in other turbulent times in the U.S.
economy.
One area Berkshire has been active with its large cash pile is
in buying back shares of the company. The company spent about $24.7
billion last year.
"They've turned to using share buybacks as a way to create
value," said Darren Pollock, portfolio manager at Cheviot Value
Management LLC, who said Berkshire has been buying the stock when
it is undervalued.
In the letter, Mr. Buffett defended the larger-than-usual
buybacks, saying they enhance the intrinsic value for shareholders
but still leave Berkshire ample funds for any opportunities. He was
less than complimentary of other chief executives buying back
stock.
"American CEOs have an embarrassing record of devoting more
company funds to repurchases when prices have risen than when they
have tanked," he wrote.
Mr. Buffett also addressed a black mark on Berkshire's bottom
line, exposed in part by the economic impact of the pandemic. In
2020, the firm took an $11 billion write-down related to the
company's purchase of Precision Castparts in 2016.
"I paid too much for the company. No one misled me in any way --
I was simply too optimistic about PCC's normalized profit
potential. Last year, my miscalculation was laid bare by adverse
developments throughout the aerospace industry, PCC's most
important source of customers," said Mr. Buffett in his letter.
Mr. Buffett did surprise investors with one note.
He said that at Berkshire's annual meeting in May won't be held
as normal in Omaha. Instead, it will be held in Los Angeles, where
investors will be able to ask questions of him, as well as Vice
Chairmen Charlie Munger, Ajit Jain and Greg Abel. Last year, thanks
to the pandemic, Mr. Buffett's 97-year-old business partner, Mr.
Munger, wasn't able to attend.
With Messers. Buffett and Munger in their 90s, some investors
are curious to learn more about the strengths of the next
generation of Berkshire's leaders. Mr. Abel joined Mr. Buffett on
stage at last year's annual meeting.
Despite the rising profit, Berkshire's stock performance fell
short of the broader market for a second year running. The S&P
500 index increased by 16.3% for the year ended Dec. 31 while
Berkshire's stock increased 2.4%. Berkshire's stock also lagged
behind the index in 2019.
Berkshire's Class A shares closed Friday at $364,580.01, down
0.9% for the day.
Write to Jenna Telesca at jenna.telesca@wsj.com and Geoffrey
Rogow at geoffrey.rogow@wsj.com
(END) Dow Jones Newswires
February 27, 2021 09:46 ET (14:46 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.