Warren Buffett isn't done.
With the completion of his biggest acquisition — this month's purchase of Burlington Northern Santa Fe Corp. — and his cash down to a mere $20 billion or so, one might think the 79-year-old chairman and CEO of Berkshire Hathaway Inc. would relax.
Some observers have called the railroad purchase the capstone of his career, given its size and importance to Berkshire's future.
But in his annual letter to shareholders, published online Saturday and containing his folksy commentary on a wide range of topics, Buffett said he was hungry for more.
Noting that the Omaha-based Berkshire now owns hundreds of businesses with about 257,000 employees, Buffett wrote: “We hope to have many more of each.”
Buffett pledged to “pour huge sums of money” into businesses that require big investments in return for “decent” profits, and added:
“If our expectations are met — and we believe that they will be — Berkshire's ever-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead.”
By owning businesses such as the railroad, electricity networks and natural gas pipelines that consume lots of money, Berkshire is part of a “social compact” with government regulators, he said.
For the businesses' “huge investments” in power plants, electrical lines and railroad tracks, wise regulators allow the opportunity to make reasonable profits, Buffett said.
“It is inconceivable that our country will realize anything close to its full economic potential without its possessing first-class electricity and railroad systems,” Buffett wrote. “We will do our part to see that they exist.”
Buffett's letter to shareholders is noted for its plain-language explanation of his businesses and related topics, and this year's version was tailored in part to an estimated 65,000 former Burlington Northern shareholders who traded their shares for Berkshire stock in the railroad purchase.
Much of the report explains the companies Berkshire owns and Buffett's business philosophy — “both a freshman orientation session for our BNSF newcomers and a refresher course for Berkshire veterans.”
Added to Berkshire's existing 500,000 shareholders, the influx means Berkshire's shareholder meeting at the Qwest Center Omaha on May 1 is likely to outdraw last year's record crowd of 35,000, Buffett said.
While most of the events surrounding the meeting will be the same, he is offering two meeting credentials per shareholder instead of the usual four. He also discontinued the after-meeting meet-and-greet session with foreign shareholders, which he said took 2½ hours last year.
Among encouraging comments in the report, Buffett said that the national slump in housing should be over within a year or so but that housing prices would remain “far below ‘bubble' levels, of course.”
This could hurt sellers and lenders, but buyers will benefit, he said.
Problems will continue with high-value houses and those in parts of the country “where overbuilding was particularly egregious,” Buffett wrote, but elsewhere the supply of new houses will be back in line with the demand.
He said the country has wisely reduced the number of houses being built, so that buyers can absorb the surplus. The alternatives, Buffett wrote humorously:
“Blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the ‘cash-for-clunkers program,'” or “speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers.”
Among reports on Berkshire's businesses, Buffett said that he was more excited than ever as the owner of auto insurer GEICO, but the company could see slower growth in 2010.
Slumping auto sales have reduced U.S. vehicle registrations, and higher unemployment is causing more people to go uninsured. “That's illegal almost everywhere, but if you've lost your job and still want to drive ...”
Buffett also said that his insistence that GEICO go into the credit card business caused a loss of about $50 million. GEICO managers warned against it, he said, but “I subtly indicated that I was older and wiser.
“I was just older.”
Berkshire's retail, manufacturing and service companies saw their profits drop by half to $1.1 billion, largely because of the recession. Sales were down by 6.7 percent to $61.7 billion.
An exception, Buffett said, was the McLane Co., which distributes goods to retailers including Walmart. Nine retail companies, including Borsheim's and Nebraska Furniture Mart in Omaha, improved profits despite lower sales.
Buffett said Berkshire's General Reinsurance is now “a gleaming jewel in our insurance crown” after its troubled past. Some former General Re executives are serving prison terms over illegal transactions in 2000 and 2001, but Buffett said current CEO Tad Montross had “an outstanding underwriting year” in 2009, and acquired Cologne Reinsurance, a leading German firm.
Buffett said he sold stock in ConocoPhillips, Moody's Procter & Gamble and Johnson & Johnson to raise money for other purchases, but he expected the prices of those stocks to be higher in the future.
Buffett praised David Sokol, chairman of MidAmerican Energy Holdings, and Greg Abel, CEO, noting that its utility operations in Iowa and several Western states have earned $2.5 billion over 10 years while spending $3 billion on wind- generation facilities.
He also praised Sokol for taking over management of NetJets, which sells partial ownership of private aircraft.
Without Berkshire's guarantee of NetJets' debt, it would have been out of business, Buffett said. The company lost $157 million in 11 years under Berkshire ownership, Buffett reported.
“It's clear that I failed you in letting NetJets descend into this condition. But, luckily, I have been bailed out.”
He said the “enormously talented” Sokol, who has been mentioned as a possible successor to Buffett as Berkshire CEO, has made it “solidly profitable.”
Throughout the financial problems, however, Buffett said NetJets kept “top-of-the-line standards for safety and service,” which he said was important because his own family uses its airplanes for travel. “In short, we eat our own cooking. In the aviation business, no other testimonial means more.”
Buffett's usual discussion about management succession at Berkshire was similar to last year's, although he added wording that made it less certain that his son, Howard, would succeed him as chairman, as previously indicated.
Buffett repeated his explanation that his job likely would be split between a CEO in charge of operations and one or more investment executives — people who either work for Berkshire now or are “available to Berkshire.”
“Our managerial roster has never been stronger,” Buffett added this year.
Sokol has been viewed as the most likely CEO choice, although the identity of successors remains secret.
Buffett repeated his assurance that Berkshire's board of directors would maintain the company's business philosophy, but he added: “I believe it would be wise when I am no longer CEO to have a member of the Buffett family serve as the nonpaid, nonexecutive chairman of the board. That decision, however, will be the responsibility of the then board of directors.”
Howard Buffett has become increasingly involved in work related to his foundation, including its emphasis on improving food production and water in developing countries, and he travels frequently to other continents.
The report said Berkshire's 2009 gain in value was its biggest since 2003, a 19.8 percent increase. Buffett compares the company's performance with the Standard & Poor's index of 500 stocks, which gained 26.5 percent, or 6.7 percentage points better.
It was only the seventh time since 1965 that the index outperformed Berkshire. Buffett said it's more important to exceed the S&P 500 during down years than during boom times. For 2008, for example, the index declined 37 percent, while Berkshire declined only 9.6 percent.
“In other words, our defense has been better than our offense, and that's likely to continue,” Buffett wrote.
He pegged Berkshire's per-share book value at the end of 2009 at $84,487 per share, up from $70,530 a year earlier. That's a separate figure from the market price Berkshire shares bring from investors, currently $119,800 each.
Net income at Berkshire was $3.05 billion in the fourth quarter of 2009, compared with $117 million a year earlier, and $8.06 billion for all of 2009, up 61 percent from $5 billion in 2008. Revenue increased 4.4 percent to $112.5 billion, although many of Berkshire's construction-related businesses showed declines.
At the end of his letter, Buffett issued his usual invitation to shareholders to attend the “annual Woodstock for Capitalists” in Omaha, adding this:
“P.S. Come by rail.”
Contact the writer:
444-1080, steve.jordon@owh.com
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