Warren Buffett can’t take all the credit for Berkshire Hathaway’s earnings nearly doubling last year, a fact the 87-year-old billionaire readily concedes.
While net income at the Omaha, Neb.-based conglomerate rose 87 percent to $44.5 billion, “a large portion of our gain did not come from anything we accomplished at Berkshire,” he wrote in his yearly letter to investors, a missive devoid of the political and economic commentary he often includes.
Instead, the company’s bottom line included a $29.1 billion benefit from a GOP-led tax overhaul that trimmed the top rate for U.S. corporations to 21 percent from 35 percent. The boost would have been even larger but for a one-time levy on overseas holdings, Buffett explained.
As for Berkshire’s own contributions to the bottom line, pre-tax income outside of investments in businesses from Bank of America to Apple and Coca-Cola rose about 5 percent to $20 billion. Nearly half came from Burlington Northern railroad, which Buffett purchased shortly after the financial crisis, and Berkshire Hathaway Energy.
“If we look at the impact of the tax reform, that pretty much drove the results this year,” Cathy Seifert, an analyst with CFRA Research, told the Washington Examiner. “That’s a nice thing, but it’s not a sustainable thing.”
Going forward, Buffett said, Berkshire’s goal is to boost the earnings of its non-insurance group substantially. “For that to happen, we will need to make one or more huge acquisitions,” he wrote.
The company can certainly afford them. It has a cash hoard that swelled 34 percent to about $116 billion last year after Buffett and longtime partner Charlie Munger deemed most of the businesses they considered buying overvalued.
Indeed, stocks were surging across the U.S. amid optimism that President Trump and the Republicans controlling Congress would boost the economy with a combination of tax cuts, looser regulations and investments. The blue-chip Dow Jones Industrial Average rose 25 percent, and the broader S&P 500 climbed 19 percent.
“Prices for decent, but far from spectacular, businesses hit an all-time high,” Buffett said, and “price seemed almost irrelevant to an army of optimistic purchasers.” Much of that was due to the easy availability of cheap credit, Buffett said, and eager CEOs ready to heed analysts and board members who were urging mergers.
While Berkshire prefers to limit its debt and seldom finds the “synergies” that are often touted in corporate transactions, the CEO said he’s still on the hunt for deals that meet his standards.
“Despite our recent drought of acquisitions, Charlie and I believe that from time to time, Berkshire will have opportunities to make very large purchases,” Buffett wrote. “In the meantime, we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”
The challenge, said Seifert, is that Berkshire is increasingly competing with private-equity firms that are willing to saddle a target firm with debt and cash out on a quicker timetable.
“That, and valuations above where Berkshire thinks they’re attractive, have impeded their ability to do that blockbuster deal,” she said. “There’s the spoken and the unspoken. The spoken is, ‘We’re not going to overpay, and we’re going to be prudent in our use of leverage.’ The unspoken is, ‘We’re facing increased competition from private-equity firms, and that’s going to have an impact.'”
How the company’s acquisition strategy is influenced by its two new vice chairs – Ajit Jain, who heads Berkshire’s reinsurance operations, and Gregory Abel, who runs Berkshire Hathaway Energy – will likely be something investors focus on in the coming year, she said previously.
The two were promoted to the role previously held only by the 94-year-old Munger earlier this year, moves that Buffett said were part of the company’s succession plan.
The announcement quelled some of the speculation about how Berkshire — a company Buffett transformed from a textile producer in the 1960s to a $500 billion conglomerate with businesses from railroads to insurance and manufacturing — would handle his eventual departure.
Abel joined Berkshire Hathaway Energy in 1992, while Jain took his first position with Berkshire Hathaway Insurance Group in 1986, the Omaha, Neb.-based company said in a statement.
For now, both Munger and Buffett will remain in their current roles, overseeing capital investments in stock as well as mergers and acquisitions.
“That’s an activity both Charlie and I enjoy and in which we have acquired some useful experience,” Buffett wrote. “In a general sense, grey hair doesn’t hurt on this playing field: You don’t need good hand-eye coordination or well-toned muscles to push money around, thank heavens.”
In terms of overall health, Buffett added, he’s never felt better. “I love running Berkshire,” he said, “and if enjoying life promotes longevity, Methuselah’s record is in jeopardy.”
