Buffett defends stock push as Berkshire profit smashes record

February 24, 2020 09:45
Warren Buffett, 89, has sought Berkshire shareholders that the conglomerate is fully prepared for when he and 96-year-old Vice Chairman Charlie Munger are no longer around. Photo: Reuters

Billionaire investor Warren Buffett on Saturday forcefully defended Berkshire Hathaway's decision to invest heavily in stocks of firms such as Apple as he labors through a four-year drought since his last major acquisition of a company, Reuters reports.

Buffett, 89, also used his annual letter to Berkshire shareholders to assure that they should not worry about the future of the company, which is "100% prepared" for when he and 96-year-old Vice Chairman Charlie Munger are no longer around, the report said.

Berkshire posted record full-year earnings of US$81.42 billion, nearly twice the prior high from 2017, boosted by unrealized gains from its stock investments.

Operating profit, however, fell 3 percent to US$23.97 billion last year.

The Omaha, Nebraska-based conglomerate ended 2019 with a US$128 billion cash hoard, having made no major acquisitions since paying US$32.1 billion in January 2016 for aircraft parts maker Precision Castparts.

Buffett lamented his inability to find big companies to buy.

"The opportunities to make major acquisitions possessing our required attributes are rare,” he wrote.

The record profit is largely the result of an accounting rule that Buffett urges investors to ignore, requiring Berkshire to report paper gains and losses from its stock holdings with net income.

Buffett said that while he still prefers buying whole companies, stocks are a better bet than low-yielding bonds.

He attributed that in part to the “American Tailwind,” or the economy’s ability to grow despite roadblocks such as war, high inflation and financial panic.

“If something close to current rates should prevail over the coming decades and if corporate tax rates 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,” he wrote.

 

Buffett also used his letter to comfort investors that Berkshire will be in good hands after he leaves.

In 2018, Berkshire promoted Greg Abel, 57, and Ajit Jain, 68, to vice chairmen, giving them oversight of Berkshire’s non-insurance and insurance operations, respectively, and freeing Buffett and Munger to focus on deploying capital.

Buffett also has portfolio managers Todd Combs and Ted Weschler helping him buy stocks.

"Charlie and I long ago entered the urgent zone,” Buffett wrote. "That’s not exactly great news for us. But Berkshire shareholders need not worry: Your company is 100% prepared for our departure.”

He also said shareholders will be able to ask Abel and Jain questions at Berkshire’s annual meeting on May 2, where Buffett and Munger normally do most of the talking.

Berkshire Hathaway posted a 23 percent decrease in quarterly operating profit, but soaring prices in stock holdings such as Apple enabled the conglomerate to smash its old record for full-year earnings.

Fourth-quarter operating profit fell to US$4.42 billion, from $5.72 billion a year ago.

Net income, reflecting stock gains, totaled US$29.16 billion, compared with a net loss of US$25.39 billion a year earlier.

For all of 2019, net income totaled US$81.42 billion, topping the record US$44.94 billion for 2017, when Berkshire benefited from a lower US corporate tax rate.

Buffett wrote that companies whose stocks Berkshire owns are generating returns that are “remarkable under any circumstances,” especially compared with returns on bonds.

Apple soared 86 percent in 2019 and 31 percent in the fourth quarter alone, leaving Berkshire with a US$73.7 billion year-end stake.

– Contact us at [email protected]

RC