Warren Buffett’s annual letter to Berkshire Hathaway shareholders is typically a warts-and-all missive, highlighting good news while also acknowledging missteps.
The letter, alongside Berkshire’s annual report, is scheduled for release at 8 a.m. Eastern on the company’s website, where investors can also comb through Buffett’s past missives. The annual report will put a cap on what’s shaped up to be a strong 2018. Through the first nine months of the fiscal year, Berkshire saw operating profits rise 71% to $19.1 billion versus the same period a year earlier.
Share performance, however, has been lackluster. “A” class shares are up 0.4% over the past 12 months, changing hands Friday near $302,471, versus a 3.1% rise for the S&P
On the bad news front, the letter from Berkshire’s chairman and chief executive and its annual report will be watched for details of the impact of the bankruptcy of California utility PG&E Corp. as it faced more than $30 billion in estimated liability costs from numerous California wildfires.
Cathy Seifert, equity analyst at CFRA Research, observed in a Thursday note that Berkshire’s exposure is twofold. First, Berkshire Hathaway Energy has several units, including its Topaz Solar renewable energy venture, that depend on the utility for the bulk of their revenues through power-purchase agreements.
“While Berkshire Energy accounts for less than 10% of Berkshire’s annual revenues, we still view this development as concerning since it affects Berkshire Energy’s core operating model. As PCG progresses through its bankruptcy process, we anticipate Berkshire could be a potential buyer of some PCG assets,” Seifert wrote.
Second, Berkshire is also one of PG&E’s liability insurers, though it hasn’t yet disclosed its exposure to the utility’s liability claims. PG&E announced in late 2018, as it prepared to file for bankruptcy, that it had increased liability coverage for wildfire events to $1.4 billion from $800 million for the period from Aug. 1, 2018, to July 31, 2019, Seifert said.
Meanwhile, other parts of the letter might sound familiar.
Acquisition drought
Buffett spent a chunk of last year’s letter explaining why Berkshire has been unable to deploy its growing cash pile — estimated to now stand at nearly $104 billion — in acquisitions. In large part, he said, the fault was down to other chief executives who’ve proven ready to open their wallets to make acquisitions regardless of price.
It’s now been three years since Berkshire last bagged an “elephant,” as Buffett refers to the big-time acquisitions, in the form of a $32.7 billion acquisition of Precision Castparts in 2016. As The Wall Street Journal’s Nicole Friedman points out, Buffett also has competition from private equity and other funds looking to make acquisitions and who, like those overly “can-do” chief executives, are also willing to pay more than Berkshire.
Equity portfolio
The lack of big acquisitions puts more of an onus on Berkshire’s $183 billion equity portfolio. Investors will be eager to see any discussion about those equity holdings, which include large stakes in Apple Inc. and financial sector stocks. Berkshire did trim its holdings of Apple in the fourth quarter, according to the company’s latest 13-F filing, but the iPhone maker remains its largest equity position.
In what may be a subject for next year’s letter — and May’s annual shareholder meeting — the portfolio and Berkshire’s share price took a hit Friday as Kraft Heinz Co. stock plunged following the announcement of a dividend cut and the disclosure that it is the subject of a government investigation.
According to a regulatory filing, Kraft Heinz was Berkshire’s sixth-largest holding as of the end of the fourth quarter, with a stake of more than 325 million shares.
Buybacks
Buffett early last year left the door open to a change in Berkshire’s buyback policy, and in July the board approved a plan that allows Berkshire to repurchase shares whenever Buffett and Vice Chairman Charlie Munger believe the price is below the company’s intrinsic value, on a conservative basis.
CFRA’s Seifert said that gives Buffett and Munger significant discretion when it comes to allocating capital, though it wasn’t aggressively implemented in the third quarter. It will be interesting to see if share repurchases rose in the fourth quarter as Berkshire’s share price fell, providing an attractive repurchase opportunity, she said, while a lack of repurchases could lead investors to question Berkhsire’s commitment to buybacks.
Succession
The question of who will take the reins when the 88-year-old Buffett is gone is a perennial one. And it’s one that’s been regularly left largely unanswered in past letters and annual meetings. Last year, Berkshire did make Greg Abel and Ajit Jain, long seen as potential successors, vice chairmen, putting Abel in charge of insurance operations and Jain in charge of non-insurance businesses.
Investors will be looking to the letter for further clues as to whether either man is in line for the top job.
William Watts
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