JPMorgan Chase – Berkshire Bought Back $9 Billion of Its Shares in the Fourth Quarter

In his annual shareholder letter, CEO Warren Buffett noted that Berkshire (ticker: BRK.A, BRK.B) repurchased 5.2% of its stock during 2020.

“Last year we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 ‘A’ shares, spending $24.7 billion in the process. That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet,” Buffett wrote.

“Following criteria [Vice Chairman Charlie Munger] and I have long recommended, we made those purchases because we believed they would both enhance the intrinsic value per share for continuing shareholders and would leave Berkshire with more than ample funds for any opportunities or problems it might encounter.”

The buybacks appeared to continue at elevated pace in the current quarter, with Berkshire repurchasing more than $4 billion of stock through mid-February, based on our analysis using the share count disclosed in the annual report.

Berkshire ended 2020 with ample cash and equivalents of $138 billion, up from $128 billion at the end of 2019 but down from about $145 billion on Sept. 30.

The repurchase activity could cheer investors Monday because the sizable fourth-quarter buyback indicated that Buffett viewed the stock as attractive in the fourth quarter even as it appreciated about 10%.

Berkshire’s class A shares, which finished Friday at $364,580, are up 4.7% so far in 2021. The class B stock, which is up 3.7% this year, ended Friday at $240.51.

Buffett said that Berkshire will be judicious in its share repurchases. “In no way do we think that Berkshire shares should be repurchased at simply any price,” he wrote. “I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse.”

The continuing share repurchases so far in 2021 indicate that Buffett sees the stock as attractive trading for under 1.3 times its year-end 2020 book value of $287,000 per class A share. That’s below an average of about 1.4 times book value over the past five years. The financial data in the annual report also highlighted missed investment opportunities in 2020 as Berkshire failed to capitalize on early-year market turmoil.

Berkshire was a net seller of more than $8 billion of stocks in 2020 as it liquidated airline holdings and some financial stocks, including

JPMorgan Chase

(JPM) and

Goldman Sachs Group

(GS). Buffett continued to find few businesses to buy as Berkshire spent about $2 billion on acquisitions mostly related to its purchase of gas pipeline assets from

Dominion Energy

(D). What Buffett calls an elephant-size deal remains elusive.

Berkshire’s fourth-quarter operating profits rose 19% to around $3,224 per class A share on gains in the company’s railroad, utility, and energy businesses and reduced insurance underwriting losses. Total operating profits increased 14%, to $5 billion, in the period.

Total earnings in the quarter were enormous at $35.9 billion, reflecting $30 billion of investment gains driven by paper profits in the company’s equity portfolio that totaled $281 billion at year-end. The fourth-quarter profits were up 23% from the same period in 2019, when Berkshire also benefited from the stock market’s strength.

For the year, Berkshire’s operating profits fell 9% to $21.9 billion. Buffett commented on the performance in the annual letter.

“Operating earnings are what count most, even during periods when they are not the largest item in our GAAP total,” he wrote. “Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situated businesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earnings fell 9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares.”

Buffett tells investors to focus on operating earnings because the paper gains in the equity portfolio that run through the income statement are one-time events with no predictive value.

Investors tend not to focus much on quarterly swings in Berkshire’s earnings, choosing to follow long-term trends instead.

Buffett wrote in the letter that Berkshire has four “jewels” among its many assets and businesses. They are its huge property and casualty insurance operations headed by Berkshire veteran Ajit Jain; railroad operator Burlington Northern Santa Fe; Berkshire Hathaway Energy, mostly an electric utility business of which Berkshire owns 91%; and a 5.4% stake in

Apple

(AAPL).

Burlington Northern, the largest of the U.S. railroads by freight volume, probably is worth a similar amount to its closest rival,

Union Pacific

(UNP). Berkshire Hathaway Energy likely is worth $50 billion or more based on its earnings last year of $3.4 billion and the price at which the company has bought shares from insiders. Union Pacific has a market value of $138 billion.

Berkshire owned 908 million Apple shares worth $120 billion at year-end 2020. Berkshire’s current market value is around $565 billion.

Buffett contrasted the equity-heavy investments of its insurance units enabled by the company’s financial strength to the bond-laden portfolio of rivals.

“[B]onds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond—the yield was 0.93% at year-end—had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide—whether pension funds, insurance companies or retirees—face a bleak future.”

Buffett acknowledged that Berkshire had overpaid for its 2016 purchase of Precision Castparts, a maker of aircraft parts that has been hard hit by the aerospace downturn, for around $33 billion.

Berkshire took $11 billion in asset write-downs in 2020, with almost all of that attributable to Precision Castparts.

“I paid too much for the company. No one misled me in any way—I was simply too optimistic about PCC’s normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers,” Buffett wrote.

Precision Castparts has been Berkshire’s largest acquisition in the past 10 years. In its annual report, Berkshire said that the unit’s revenues were down 29% in 2020 to $7.3 billion, while pretax profits declined 64.5% to $650 million. The company cut its worldwide workforce by 40%.

“PCC has taken aggressive restructuring actions to resize operations in response to reduced expected volumes in aerospace markets,” Berkshire said.

Buffett noted that Berkshire’s annual meeting on May 1 will be a virtual affair, as it was last year, and will be held in Los Angeles, the home of Vice Chairman Munger. The meeting—a Woodstock for Capitalists, as Buffett calls it—normally is held in Berkshire’s hometown of Omaha, Neb.

Buffett wrote that he’s excited that Munger will share the stage with him to field shareholder questions, and that Berkshire Vice Chairmen Greg Abel and Ajit Jain will be available to answer questions about their operations. Abel oversees Berkshire’s noninsurance businesses, and Jain, the insurance empire.

“And now—drum roll, please—a surprise,” Buffett wrote. “This year our meeting will be held in Los Angeles…and Charlie will be on stage with me offering answers and observations throughout the 31⁄2-hour question period. I missed him last year and, more important, you clearly missed him.”

This could be one of the last meetings that the legendary pair share the stage, with Buffett now 90 and Munger 97.

Buffett didn’t discuss CEO succession in the letter, continuing his practice. Barron’s and many other observers have speculated that Abel will follow Buffett as CEO.

Write to Andrew Bary at andrew.bary@barrons.com