Warren Buffett’s annual letter to shareholders was released over the weekend. Here are the highlights:
Book value increased 19.8% last year, gaining $21.8 billion in net worth, and is at $84,487 per share. In the last 45 years, Berkshire never had a five-year period during which its book value didn’t outperform the S&P 500.
The company had net income of $8.06 billion, or $5,193 per share in 2009, which is about $155 million a week. It has $156.6 billion in cash and securities, or approximately $100,000/share.
The letter included a primer on Berkshire’s approach to business, for the benefit of the 60,000 new shareholders due to the acquisition of Burlington Northern Santa Fe (BNSF). It contained details on Berkhire’s four separate business segments:
1) Insurance, which had a float of $62 billion at the end of the year, and earned an underwriting profit of over $1.5 billion in 2009.
2) Regulated utility business, which earned Berkshire over1 billion for the year. In the future, the newly acquired BNSF railroad business is going to be a part of this segment. Berkshire is committed to providing the country with reliable electricity and railroad systems, despite the capital intensive nature of this business and its heavy demand for continuing capital expenditures.
3) Manufacturing, Service and Retailing, with over $60 billion in revenue and net income of $1.1 billion for the year. The diverse businesses Berkshire owns in this segment distribute groceries, sell chocolate, furniture, jewelry, paint, shoes, cutting tools, ice cream and more. Most of these operations suffered from the recession, but Buffett singles out NetJets, which sells fractional ownership of jets, as particularly problematic. NetJets has been losing money and without Berkshire guaranteeing its debt, would be out of business. Buffett assigned Dave Sokol as its new CEO, with the task of turning NetJets around.
4) Financial Products: Berkshire owns Clayton Homes, a manufactured home builder, an industry that has been in shambles partly because mortgage rates kept low by the government do not apply to low cost manufactured homes. Berkshire also has furniture and trailer leasing operations that have been hit by the economic downturn. This business earned $781million pre-tax last year.
Berkshire has common stock investments worth $59 billion, with a cost basis of $34.6 billion. In the cases of Conoco Phillips, Kraft, Sanofi Aventis and US Bancorp, the market value of its holdings is below Berkshire’s cost. In addition Berkshire owns $26 billion of non traded stocks, in companies like GE, Goldman Sachs and others. These holdings pay Berkshire $2.1 billion in annual dividends and interest.
The 20 largest holdings in Berkshire’s US portfolio all increased in value in the past 12 months. Coca-Cola Co., Berkshire’s top holding, climbed 29 per cent on the New York Stock Exchange. Wells Fargo & Co. doubled and American Express Co. tripled. The US portfolio was valued at $57.9 billion at Dec. 31, a 12 per cent rise from a year earlier.
Derivatives added $US1.05 billion to earnings in the quarter, compared with a loss of $US4.61 billion a year earlier after the collapse of Lehman Brothers Holdings Inc. Liabilities on Buffett’s so-called equity-index puts narrow when four stock indexes, including the Standard & Poor’s 500, climb closer to the levels they were at when Buffett made the deals near the market’s peak in 2006 and 2007. The four indexes — the S&P, the U.K.’s FTSE 100 Index, the Dow Jones Euro Stoxx 50 Index and Japan’s Nikkei 225 Stock Average — rose in the fourth quarter.
Berkshire has also sold credit-default swaps on individual companies, and contracts that require the firm to pay when credit losses occur at borrowers included in high-yield bond indexes. The maximum Berkshire would still have to pay on agreements tied to the indexes is about $US5.5 billion, the firm said
On the Housing Market
Billionaire Warren Buffett said the U.S. will recover from the residential real estate slump by 2011 as demand for houses catches up with the supply that accumulated during the bubble.
“Within a year or so, residential housing problems should largely be behind us,” Buffett wrote Saturday in his annual letter to the shareholders of his Berkshire Hathaway. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means.“
Record foreclosures flooded a U.S. real estate market already glutted with unsold property, causing housing starts to fall.
“People thought it was good news a few years back when housing starts — the supply side of the picture — were running about 2 million annually,” wrote Buffett, 79, chairman and CEO of Omaha-based Berkshire. “But household formations — the demand side — only amounted to about 1.2 million.“
Buffett mentioned that while shareholders suffered during the recent crash, the top people at the banks got off relatively lightly:
“It has not been shareholders who have botched the operations of some of our country’s largest financial institutions yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years” wrote Buffett.
According to Buffett, the behavior of these CEOs and directors needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price — one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.
On Future Returns
Berkshire Vice Chairman Charlie Munger and he, Buffett wrote, “believe that our book value — understated though it is — supplies the most useful tracking device for changes in intrinsic value. By this measurement … our book value since the start of fiscal 1965 has grown at a rate of 20.3% compounded annually.”
Based on market prices, said Buffett, Berkshire’s gains since 1965 would be 22% compounded annually.
However, Buffett sounded a note of warning, claiming that such returns may become a thing of the past. “Our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue,” he wrote.
He foresees “better-than-average results over time,” he said, before adding: “But huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge.”