Berkshire Hathaway Inc.’s fourth-quarter profits rose on the back of a soaring stock market.
Berkshire’s net earnings rose to $35.8 billion, or $23,015 a Class A share equivalent, up almost 23% from the year before’s profit of $29.2 billion, or $17,909 a share.
Operating earnings, which exclude some investment results, rose to $5 billion from $4.4 billion the year prior. Billionaire investor Warren Buffett has said operating earnings better reflect Berkshire’s performance than net earnings that incorporate unrealized investment gains or losses.
Berkshire runs a large insurance operation as well as railroad holdings, utilities, industrial manufacturers, retailers and even auto dealerships. It also holds large investments, especially in the stock market.
An accounting-rule change in recent years has meant that Berkshire’s earnings often reflect the larger performance of the stock market.
Ninety-year-old Mr. Buffett has built his sprawling Omaha, Neb., conglomerate as a vehicle for investors interested in long-term gains. As such, Berkshire operates a variety of different businesses that Mr. Buffett thinks will stand the test of time. The company also invests the “float” from the premiums its insurance customers pay.
Also released Saturday was Mr. Buffett’s annual letter to shareholders. In the letter, Mr. Buffett discussed myriad topics, including the company’s history, investor-base and Berkshire’s decision to largely hold off on large purchases in the past year.
He was particularly critical of those who have increasingly turned to riskier investments thanks to record-low interest rates. This practice, he argues, will be a mistake.
“Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers. Risky loans, however, are not the answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim,” he said.
While Berkshire has made some smaller investments over the last year — most recently investing $8.6 billion in Verizon Communications Inc. and $4.1 billion in Chevron Corp. — the investments haven’t made a large dent in the conglomerate’s available cash. And Berkshire hasn’t bought a majority stake in a major business.
Berkshire’s available cash and short-term Treasury bonds were $138.3 billion in the fourth quarter. Investors have been watching for over a year to see if Mr. Buffett would buy a significant stake in a large company as he has in other turbulent times in the U.S. economy.
One area Berkshire has been active with its large cash pile is in buying back shares of the company. The company spent about $24.7 billion last year.
“They’ve turned to using share buybacks as a way to create value,” said Darren Pollock, portfolio manager at Cheviot Value Management LLC, who said Berkshire has been buying the stock when it is undervalued.
In the letter, Mr. Buffett defended the larger-than-usual buybacks, saying they enhance the intrinsic value for shareholders but still leave Berkshire ample funds for any opportunities. He was less than complimentary of other chief executives buying back stock.
“American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked,” he wrote.
Mr. Buffett also addressed a black mark on Berkshire’s bottom line, exposed in part by the economic impact of the pandemic. In 2020, the firm took an $11 billion write-down related to the company’s purchase of Precision Castparts in 2016.
“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,” said Mr. Buffett in his letter.
Mr. Buffett did surprise investors with one note.
He said that at Berkshire’s annual meeting in May won’t be held as normal in Omaha. Instead, it will be held in Los Angeles, where investors will be able to ask questions of him, as well as Vice Chairmen Charlie Munger, Ajit Jain and Greg Abel. Last year, thanks to the pandemic, Mr. Buffett’s 97-year-old business partner, Mr. Munger, wasn’t able to attend.
With Messers. Buffett and Munger in their 90s, some investors are curious to learn more about the strengths of the next generation of Berkshire’s leaders. Mr. Abel joined Mr. Buffett on stage at last year’s annual meeting.