A little over a week ago, Warren Buffett released his annual letter to the shareholders of Berkshire Hathaway. The letter of 24 February. 2024 was attached to an 2023 annual report for the company, but the report doesn’t generate the same sort of buzz. I will of course be talking about the letter here, but, the report will get a mention.
Warren Buffett begins his letter with a heartfelt message about the death of Charlie Munger, his friend, business partner, and mentor. He was, according to Mr Buffett the person behind the switch to buying wonderful businesses at fair prices or better from buying fair businesses at wonderful prices that was a theme of Warren Buffetts early investing career.
“Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale.”
Charlie Munger 1965 according to Warren Buffett’s annual letter to shareholders included in the Berkshire Hathaway 2023 annual report
For that reason, Warren Buffett called has called Charlie Munger the “architect” of the present day Berkshire Hathaway”.
Investors tend to ignore a big chunk of Berkshire Hathaway
Discussions about Berkshire Hathaway usually start and end with what stocks Warren Buffett is buying and selling. If you own Berkshire Hathaway A or B class shares you do indeed have a sliver of a claim on a bunch of marketable equity securities that the company owns. These appear on the balance sheet as Investments in equity securities and at 31 December, 2023 were reported at a fair value of $353.8 billion of which 75% of which was concentrated in the stock of five companies:
- Apple Inc $174.0 billion
- Bank of America Corporation $34.8 billion
- American Express Company $28.4 billion
- The Coca-Cola company $23.6 billion
- Chevron Corporation $18.8 billion
The performance of these investments in equity securities is what get market commentators talking, and with good reason as they are worth 223% more than the $109.4 billion they were bought for. But, even at a fair value of a whopping $358.8 billion these investments are responsible for 33% of Berkshire’s total assets.
Berkshire Hathaway has $167.6 billion in cash and short-term US Treasury Bills on its balance sheet. There is $23.8 billion invested in fixed income investments. Property, plant and equipment related to its railroad, energy and utilities businesses is valued at $177.6 billion, and for the insurance businesses its $22 billion. There is $100 billion tied up in working capital.
Berkshire Hathaway is a holding company. For the likes of Apple and bank of America, Berkshire owns less than 50% of the total stock float. Therefore it registers the investments on its balance sheet pretty much like you or I would see when looking at our brokerage accounts. The value of the investment goes up and down, and thats pretty much it. But Berkshire also holds subsidiaries that it has a controlling stake in (> 50%), and for these companies it breaks out the assets on its balance sheet, and its profit and loss statement.
Berkshire runs regulated utility businesses, nature gas pipelines, and liquified natural gas export, import and storage facility. It also runs electricity distribution businesses in the UK and Canada. Its utility and energy operating revenues for 2023 were $73.0 billion. Its insurance (and other) businesses—which includes GEICO—generated $236.1 billion in revenue in 2023, and its freight rail transport revenues were $23.8 billion. Total revenues from these businesses was $364 billon last year and after costs and expenses Berkshire shareholders were left with $96 billion in earnings.
Market commentators did get interested in a Berkshire company that was not a portfolio one like Apple in 2019. Berkshire owns 26.7% of the outstanding stock of Kraft Heinz. Because thats between 20 and 50% it accounts for it not by consolidating, like the railroad companies, not does it report an asset and adjust it as market prices change like with Bank of America. Instead it uses the equity method. There is still an asset for these equity method investments—$29.1 billion in 2023—but this is adjusted not by market price movements, but by a a proportional share of net income and dividends paid by the underlying company. For example, if Kraft Heinz makes $100 million, then Berkshire increases its its investment asset by $26 million and reports the same amount on its income statement. If Kraft made a loss of the same amount, then Berkshire decreases its equity method asset by that amount, and reports the loss on is income statement. In the fourth-quarter of 2019 Berkshire was forced into a loss partly because Kraft reported losses. This set the investment community abuzz and is one of the few occasions when a non-portfolio company investment dominated the conversation around Berkshire.
US stock market capital gains are favoured
Mr Buffett favours US equities now, in the past and for the future. In his latest letter he said that is no point in time since his first stock purchase (of a US company) sometime in 1942, when he has not had a majority of his net worth in US equities. Since most of his wealth is tied up in Berkshire Hathaway stock, that is itself heavily, heavily invested in the US, it’s easy to confirm that this is in fact true.
This commitment to the US seems absolute at the moment as he remarked that “Outside of the US, there are essentially no candidates that are meaningful options for capital deployment at Berkshire” in his latest letter. That’s certainly true historically as all of Berkshires deployed capital is within the confines of the US, and Warren Buffett has suggested that investing in a S&P 500 tracker is a good choice for most investors.
However, there is $167.6 billion in cash and cash equivalents and short term marketable securities sitting on Berkshires balance sheet looking for a home. In terms of new capital deployment then, it appears that even the US is not a meaningful option. Further on in the letter Mr Buffett states that “if you believe that American investors are now more stable than in the past, think back to September 2008… such instant panics won’t happen often – but they will happen”. Sounds like he sees a storm is coming and wants to keep his powder dry for when the skies start to clear.
Warren Buffets favourite stock to be might be Berkshire Hathaway
Berkshire Hathaway repurchased a combined 664,208 shares of its class A and class B common stock in the last three months of 2023 for a total cost of $2.1 billion. This is the 22nd consecutive quarter in which the Oracle off Omaha has bought shares in Berkshire Hathaway as part of the company’s common stock repurchase program. Since July 2018 this program had spent $74 billion in bringing Berkshire shares from the hands of outside investors back into its treasury.
Since Berkshire does not pay a dividend, this is one way of returning cash to shareholders. Now, you might ask, if those investors were going to sell their shares why not let them sell to someone else rather than using the companies cash and calling it a return, but that would disregard the boon for committed investors. Since earnings are frequently computed on a per share basis, taking shares off the market means for any level of earnings the per share amount increases. Since higher earnings per share are generally regarded as a good thing the Berkshire stock price should track higher, and investors own increasingly larger slices of the company as shares are repurchased.
If we take the $74 billion spent on Berkshire stock since July 2018, and compare it to the cost basis of all stocks in Berkshires portfolio of $109.4 billion, then it’s not a stretch to suggest that Berkshire stock is Berkshire’s favourite stock.
DISCLAIMER: James J. McCombie does not own any of the shares mentioned in this article. The Storied Investor has no beneficial ownership position in any of the stocks or securities mentioned. No comment in this article should be construed as a recommendation of, or opinion regarding the future performance of, any stock or security or collection of them mentioned herein. Opinions expressed are the author’s and do not represent the views of The Storied Investor.
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