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What will Buffett do with $167 billion in cash?

AInvestSunday, Feb 25, 2024 9:15 pm ET
3min read

Berkshire Hathaway (BRK.A), the conglomerate run by Warren Buffett, reported strong operating earnings for the fourth quarter of 2023. Operating earnings per Class A share rose 30% to $5,881, about 3% above expectations. Profits were lower in two key divisions: Burlington Northern Santa Fe Railway and Berkshire Hathaway Energy. However, the beat was smaller than in the previous quarter when earnings topped expectations by nearly 15%.

Berkshire's eclectic mix of businesses, combined with the strong performance of its investments, delivered a profit of $37.57 billion, or $26,043 per Class A share, in the fourth quarter. This was more than double the $18.08 billion profit, or $12,355 per Class A share, reported a year earlier. However, Buffett cautioned that investors should largely ignore these bottom-line figures because they are swayed so much by the paper value of its investments. Instead, he has long urged investors to pay attention to Berkshire's operating earnings that exclude investments.

The strong performance of Berkshire Hathaway's insurance businesses, including Geico, contributed to the company's overall profit. Geico reported net underwriting earnings of $5.428 billion in 2023, driven by premium rate increases and lower claims. However, its other divisions, such as Burlington Northern Santa Fe Railway, reported a decline in earnings. In the fourth quarter, operating earnings from railroads dropped to $1.355 billion, down from $1.469 billion a year ago, while operating earnings for utilities and energy fell to $632 million, down from $739 million the prior year.

Buffett, 93, discussed the disappointing results for both divisions in his annual shareholder letter, citing higher labor costs at BNSF and wildfire losses at BHE's western utilities. He reassured investors that Berkshire is a safe place to park their cash as long as they don't expect eye-popping performance because there are no attractively priced acquisition targets big enough to make a meaningful difference in the company's results. Buffett also warned investors about the dangers of Wall Street, comparing it to a denizen of thieves.

Buffett emphasized the importance of focusing on Berkshire Hathaway's operating earnings rather than the bottom line figures, which can be heavily influenced by the paper value of its investments. The company's operating earnings exclude investment gains and losses on equity securities.

He also told shareholders that he has no plans to sell its stakes in nearly 30% of Occidental Petroleum, and 9% of five large Japanese trading houses, but has no plans to buy the oil producer outright.

Berkshire Hathaway held $167.6 billion in cash in the fourth quarter, a record level that surpasses the $157.2 billion the conglomerate held in the prior quarter. Berkshire has sold net $24 billion in stocks in 2023. The large cash pile and comments about overpriced assets will resonate with investors as Buffett"s reputation at spotting fairly prices assets is legendary. 

Buffett doesn't appear to view Berkshire stock as particularly cheap because the company bought back about $600 million of it in the first quarter. This pace is down from the $2.2 billion repurchased in the fourth quarter. Berkshire"s Class A stock is up 16% this year while the Class B shares have risen 17%. The total return for the S&P 500 is roughly 7%. Buffett, who determines the level of buybacks at Berkshire, has repeatedly said he is price conscious.

Buffett has warned Berkshire Hathaway shareholders that the company has virtually no possibility of eye-popping performance in the years ahead, laying bare the challenges that will confront his successors. Buffett said that Berkshire would continue to pounce on opportunities when they present themselves, as the company did in early 2022 when it ploughed more than $50bn into stocks as the market sold off.

In spite of its overall strong performance, Buffett spent part of his letter bemoaning missteps. The company is locked in high-profile litigation that could cost it more than $10bn, with its utility at the center of the storm. Its PacifiCorp electric utility paid $631mn in settlements over wildfires last year. The unit has so far taken $2.4bn of charges related to blazes in 2020 and 2022 and has warned its overall losses could spiral higher.

The company has already established a succession plan, with Vice Chairman Greg Abel set to replace Buffett as CEO. Abel, who has been overseeing all of Berkshire's noninsurance businesses since 2018, is well-regarded by managers within the company. However, investors are eager to hear more from Abel, as well as from fellow Vice Chairman Ajit Jain, who manages Berkshire's insurance businesses. Shareholders may have the opportunity to hear from them at this year's shareholder meeting in May.

Berkshire outpaced expectations but weakness at its BNSF and utility businesses held results in check. The company has slowed down its own purchases of shares which will raise a red flag for investors. In addition, Buffett"s comments about asset prices being overvalued could weigh on market confidence. Given the poor close to Friday"s session, traders would be wise to see how Buffett"s comments are digested on Monday morning. 


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