I attended my twelfth Berkshire Hathaway Annual Meeting this past weekend and found it to be as worthwhile as ever. Chairman/CEO Warren Buffett, age 86, and Vice Chairman Charlie Munger, age 93, are still at the top of their game. Their appreciative audience seemed to me larger than ever with approximately 40,000 stockholders in Omaha, NE for the meeting and related Berkshire Hathaway events.
Once again for five hours they responded to questions from financial journalists, research analysts and stockholders, many of which dealt with how the intrinsic value of Berkshire Hathaway is not reflected in its balance sheet and income statement. Here are some of the stunning highlights:
- Berkshire Hathaway’s security holdings of public companies now have unrealized gains of $90 billion not recorded in net earnings.
- Berkshire Hathaway’s float, accumulated insurance premiums reserved for future claims, now exceeds $100 billion for the first time. Carried as a liability on the balance sheet, Buffett regards these reserves as a revolving fund since premiums received for new insurance policies likely replenish insurance claims going forward. Moreover, Berkshire Hathaway’s insurance operations, which have operated at an underwriting profit for the past fourteen years, are currently expected to continue that performance with the result that the investment earnings on its $100 billion float would fall to the bottom line.
- Berkshire Hathaway has $15 billion of intangible assets, representing the cost of acquired businesses exceeding their book value, which must be amortized as expenses over many years. In 2016, the amortization of intangible expense for Berkshire Hathaway was $1.5 billion. Buffett believes this expense is unwarranted because the acquired companies would not have incurred such an enormous intangible expense had they remained independent. It is only because of Berkshire Hathaway’s ownership that the intangible expense must be deducted from profit.
Buffet believes that the intrinsic value of Berkshire Hathaway’s stock far exceeds its book value.
Positive News for the Future
- New Business in 2017
- GEICO led by Tony Nicely has signed up 700,000 new policy holders.
- Berkshire Reinsurance led by Ajit Jain received a $10 billion premium for a new reinsurance contract with AIG.
- Stock Investments
- Warrants from the purchase of Bank of America Preferred Stock are now worth $10 billion in addition to the $5 billion originally invested.
- Tod Combs and Ted Weschler
- Each of these investment managers brought into Berkshire Hathaway by Buffett are now managing $10 billion dollar portfolios and additionally have subsidiaries reporting to them.
- Stock Repurchases and Dividends
- Buffett explained that if the size of Berkshire Hathaway’s cash available for investment makes it increasingly difficult to employ, dividends and stock repurchases would be considered.
- Taxes
- Buffet said that reduction of corporate income taxes would increase profits of Berkshire Hathaway’s subsidiaries (with the exception of public utilities that have electric rate setting commissions which control profit levels).
- Management Succession
- Buffett explained that when he retires or otherwise can no longer be CEO, his successor will come from within Berkshire Hathaway. While he is not prepared to disclose the name of his successor as long as he plans to continue as CEO, he said that there is ample talent within the company from which to choose.
- Berkshire Hathaway Without Buffett
- Buffett said of Berkshire Hathaway’s stock, “If I died tonight, I think the stock would go up tomorrow.” He attributed the reason why to the market perception that the sum of Berkshire’s parts is worth more than their whole as a single company. However, he has a loyal board and loyal managers who want his principles for Berkshire Hathaway to continue for the long term benefit of its shareholders.
Past performance is not indicative of future results. The information provided in this commentary should not be considered financial advice or a recommendation to buy or sell a particular security. You should not assume that any of the investment strategies or securities discussed herein are or will be profitable. The opinions expressed herein are those of Edgemoor Investment Advisers, Inc. (Edgemoor) and are subject to change without notice. You should always obtain current information and perform due diligence before investing. All recommendations for the last 12 months are available upon request.
Edgemoor Investment Advisors, Inc. is a registered investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Edgemoor including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.
