Last year wasn’t a particularly exciting one for Berkshire Hathaway, but it was one that featured growth, particularly among the “Big Four” companies cited by Warren Buffett.
In his annual letter to shareholders released Saturday morning, the Berkshire CEO wrote there was “little action” of what he and his right-hand man Charlie Munger found new or interesting. Instead, Buffett said Berkshire made reasonable progress increasing the intrinsic value of its shares.
“That task has been my primary duty for 57 years. And it will continue to be,” he wrote.
That claim is best supported by Berkshire repurchasing its shares. Over the last two years, Buffett wrote, Berkshire has repurchased 9% of shares that were outstanding at year end 2019. The total cost of repurchasing those shares was $51.7 billion.
By repurchasing those shares, Buffett said Berkshire has increased shareholders’ ownership of all wholly and partly owned Berkshire businesses by about 10%.
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Buffett said that repurchasing shares only makes sense from Berkshire’s perspective if the price is appropriate.
“We don’t want to overpay for the shares of other companies, and it would be value-destroying if we were to overpay when we are buying Berkshire,” he wrote. “Our appetite remains large but will always remain price-dependent.”
Berkshire’s buyback of shares last year indicates Buffett didn’t see many favorable investments outside of Berkshire, said Edward Jones analyst James Shanahan.
“I think it underscores that Buffett is going to be patient and he’s not going to overpay for acquisitions. He’s not going to buy publicly traded stocks if he doesn’t see any value,” Shanahan said.
In addition to repurchasing shares, Buffett also wrote that Berkshire benefited from growth in its wholly owned insurance businesses as well as BNSF Railway and Berkshire Hathaway Energy.
BNSF and BHE, Buffett wrote, both reported record earnings of $6 billion and $4 billion, respectively, in 2021.
Buffett wrote that Berkshire added $9 billion in insurance “float,” which he described as money that Berkshire can hold and invest but that does not belong to the conglomerate.
Berkshire also benefited from Apple’s strong year. Buffett noted that Apple differs from Berkshire’s other “Giants” in that Berkshire only owns 5.55% of the tech titan. Berkshire’s ownership stake is slightly up from 5.39% a year earlier.
While that sounds like small potatoes, Buffett wrote, it led to more of a financial windfall for Berkshire. He noted that each 0.1% of Apple’s 2021 earnings amounted to $100 million.
Buffett’s inclusion of Apple as one of the “Giants” was noteworthy to Cathy Seifert, who analyzes Berkshire stock for CFRA Research.
“They were a late technology investor,” she said. “I think the fact that he highlighted (Apple) speaks to a recognition that, as an investor, it’s very difficult to ignore the information technology sector.”
The gains made from each of the giants plus growth in other areas led to $89.8 billion in earnings for the conglomerate. That is more than double the $42.5 billion in 2020 and reflects a massive rebound in the overall stock market in 2021 after the onset of the COVID-19 pandemic sent the market into a downward spiral in early 2020.
Buffett noted that Berkshire Hathaway, for the first time since 2018, outperformed the S&P 500 stock index last year.
Berkshire’s strategy has led to $144 billion in cash and cash equivalents on its balance sheet. Buffett called that an “imposing sum.”
With that much cash, Seifert said it will be interesting to see if Berkshire chooses to acquire another company or continues to buy back shares.
“That’s something I think investors will be attuned to as we head into 2022,” she said. “(But) a lot of the growth and the tail winds that we saw in 2021 may not be there in 2022.”
For his part, Shanahan said he expects Berkshire will likely slow down repurchasing shares going forward.
Beyond investment, Buffett may have sought to address a point of criticism leveled against wealthy individuals and companies. Toward the top of his letter, Buffett noted Berkshire pays “substantial” federal income taxes.
“In 2021, for example, we paid $3.3 billion while the U.S. Treasury reported total corporate income-tax receipts of $402 billion,” he said, adding Berkshire also pays substantial state and foreign taxes.
Last summer, the investigative journalism outlet ProPublica published a report stating that Buffett topped the 25 richest Americans in avoiding paying income taxes on their rising wealth. Much of Buffett’s wealth is tied up in owning Berkshire Hathaway stock. When the stock price rises, he gets richer. But because he continues to hold the stock and doesn’t turn the gains into cash, the increased wealth isn’t taxable.
Buffett responded to the report then by, in part, pointing to the $3.6 billion in corporate income taxes that Berkshire and its companies paid in 2019 — 1.5% of all corporate income taxes paid that year. ProPublica agreed that Buffett, as a major shareholder in Berkshire, was effectively paying a large chunk of that tax bill.
Both analysts viewed Buffett’s inclusion of Berkshire’s tax amounts in the letter as preempting criticism.
“I don’t think there’s anything wrong with him talking about that they pay their fair share,” Seifert said.
This is the first letter Buffett has released since Berkshire Hathaway executive Greg Abel was confirmed as Buffett’s successor after Munger first mentioned it during a question-and-answer session at last year’s shareholders meeting.
Buffett made little mention of his successor, noting that Abel, along with David Sokol, have led BHE to be a utility powerhouse and a leading force in wind, solar and transmission throughout much of the U.S.
Shanahan called Buffett’s light mention of Abel “a little bit disappointing.”
“There was an opportunity here for Warren Buffett to recognize more formally the appointment of Abel as his successor,” Shanahan said. “Frankly, I think Abel deserved a little bit better than the treatment that he’s gotten so far.”
Buffett highlighted, among others, longtime Berkshire investment managers Todd Combs and Ted Weschler. Buffett wrote that Combs and Weschler had total authority in respect to $34 billion of investments.
Seifert viewed their mention as Buffett’s way of calming investors who may worry about the fate of Berkshire once Buffett, 91, and Munger, 98, no longer oversee it.
“I think every letter that (Buffett) writes seeks to calm those fears and he does it in subtle ways,” Seifert said. “Emphasizing Todd’s and Ted’s contributions is a subtle way of sort of reassuring that there is continuity in the firm.”
Buffett also said that Berkshire will hold an in-person shareholders meeting in Omaha April 29 to May 1. It will be the first in-person shareholders meeting for Berkshire since 2019.