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Over the weekend, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) handed down its results for 2021, and at the same time, it also provided the investment guru an opportunity to release his annual letter to Berkshire shareholders.
The update has become a high-profile piece within the investment community, and it never disappoints as Buffett covers a range of issues and makes his opinions known. This is the time of the year where you come to realise that when Buffett speaks, investors listen.
This year’s update spans a number of key themes, from calling out companies that have ‘deceived’ investors with adjustments to their earnings, the importance interest rates have on asset valuations, to a glowing endorsement of tech giant Apple (NASDAQ: AAPL) and its CEO Tim Cook. The billionaire investor has also let his guard down to speak to some of the frustrations surrounding a lack of business opportunities. All the while, Buffett purchased a record US$27 billion in Berkshire shares during 2021.
Berkshire value spurs buying activity
First things first, Berkshire Hathaway was able to record a bumper year, with operating profits surging throughout the final quarter of the year and across the calendar year as well. Having previously been caught up in a slowdown amid the effects of the pandemic, this turnaround continued to gain momentum during 2021 and even prompted Buffett to back that trajectory with the company’s funds.
In total, operating earnings grew 45% in Q4 to reach US$7.3 billion, and leapt 25.2% to US$27.5 billion for the full year. Berkshire bought back US$6.9 billion of its own shares across the final quarter of the year, and a record US$27 billion worth of BRK shares in 2021. At the height of the pandemic, when the Berkshire share price slumped sharply, the firm bought US$24.7 billion of its own shares.
Cash continues to accumulate for the conglomerate, and at the end of the year, there was a near-record US$146.7 billion of cash on BRK’s balance sheet. Berkshire typically distances itself from focusing on earnings, which are mostly derived from investment gains across its holdings, but the company saw a 10% improvement here to reach US$39.6 billion in Q4, and US$89.8 billion for the full year.
In terms of earnings from its core business interests in the energy, utilities and railroad sectors, these grew 12.3% to US$2.2 billion. Even the insurance business delivered a US$372 million windfall after sustaining losses a year ago.
Buffett sings the praises of Apple
Buffett wasted no time singing the praises of Apple, and in particular its CEO Tim Cook. Berkshire benefits from nearly US$800 million in dividends from Apple per annum, and its 5.55% stake in the tech giant has been growing (5.39% a year ago) following Apple’s share buy-backs. This is something Buffett has voiced strong approval of given the earnings upside that doesn’t require Berkshire to lay out cash.
With a claim towards a share of as much as US$5.6 billion of Apple’s earnings, Buffett considers Apple one of the four “giants” driving Berkshire’s performance. He went on to pay special tribute to the company’s leadership: "Tim Cook, Apple's brilliant CEO, quite properly regards users of Apple products as his first love, but all of his other constituencies benefit from Tim's managerial touch as well."
Berkshire’s stake in Apple, which first began in 2016, is now greater than US$160 billion in value. It accounts for approximately 40% of Berkshire’s share portfolio. Buffett has even called the iPhone maker the second most-important business it holds, second only to its insurance exposure.
Calling out the ‘bull’, bemoaning a lack of opportunities
One of the other areas that is sure to set tongues wagging is Buffett’s straight-shooting when it comes to earnings. He went on to say, "Deceptive 'adjustments' to earnings – to use a polite description – have become both more frequent and more fanciful as stocks have risen. Speaking less politely, I would say that bull markets breed bloviated bull."
In isolation, the comments might raise eyebrows, but in unison with some of his other comments around the lack of attractive deals across the market, things gel together a little more clearly. The investment genius noted that “we find little that excites us”. However, the company’s near-record stockpile of cash in lieu of stakes in new businesses is seen as a temporary affair - "Charlie and I have endured similar cash-heavy positions from time to time in the past. These periods are never pleasant; they are also never permanent”.
In the meantime, the direction is clear. Share repurchases are going to be a major near-term fixture as part of Berkshire’s investment strategy and building shareholder wealth. Only when opportunities emerge at an attractive price will the conglomerate take a closer look, and even then, Buffett clarified that both he and Charlie are not stock-pickers looking to capitalise on short-term share price movements, but rather business-pickers that invest based on long-term performance expectations.
Berkshire’s other ‘giants’ are economic powerhouses
Insurers remain the biggest “giant” in the Berkshire arsenal, with their float swelling from US$19 million over 50 years ago to US$147 billion today. However, that doesn’t mean other names aren’t continually growing in importance. And while Apple might be the name that steals the headlines, Buffett hasn’t downplayed the contribution of its industrial businesses.
Berkshire holds around US$158 billion of domestic infrastructure assets on its books, with railroad business BNSF and utilities operator BHE both seeing record earnings of US$6 billion and US$4 billion respectively in 2021. They make the cut as two of Berkshire’s other “giants”. Buffett also sees tailwinds to come from the US government’s US$1 trillion spending package upgrading roads, bridges and other infrastructure around the country.
Buffett describes BNSF as “the number one artery of American commerce” and “an indispensable asset for America''. Meanwhile, BHE is viewed as “a utility powerhouse and a leading force in wind, solar and transmission throughout much of the United States”. These statements make it clear that the Oracle from Omaha has a resolute conviction surrounding the importance of high-quality, industry-leading infrastructure businesses.
The socially responsible ‘American’ enterprise
Berkshire’s investment magnate also touched on another issue - the company’s role as a ‘good’ corporate citizen, including its environmental record. Not only one of America’s most-successful businesses of all time, the company shares strong ties with the underlying performance of the economy. As the US economy has rebounded strongly, so too has Berkshire. But this is thanks to its core portfolio of bellwether stocks that drive the economy.
More directly, Berkshire paid US$3.3 billion in federal taxes during 2021, as well as significant sums of state and foreign taxes. In effect, Berkshire is a major player when it comes to ‘giving back’ to the country. Buffett sees this as a relevant facet in an age where large-cap companies are now being scrutinised with greater attention given the rise of ESG investing.
At the same time, Buffett continues to pay homage to the ‘greatness’ of the US, arguing: “absent our American home, however, Berkshire would never have come close to becoming what it is today…Berkshire’s prosperity has been fostered mightily because the company has operated in America”.
At face value these words may seem like lip service, but this is a mantra that has governed Buffett’s investment philosophy for a long time. It is clear Berkshire’s team retains a clear bias favouring home-grown investments on the back of the strength of the US economy. It also tells us Buffett has faith in the resilience of the economy as interest rates rise, something he sees as just one factor behind valuations.