Chapter 9 Part 3: Berkshire 2019

The Complete Financial History of Berkshire Hathaway | Adam J. Mead | ISBN: 978-0-85719-912-6

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Mead closes Chapter 9 with 2019 and a half-decade review. If you want one sentence for the period: Berkshire kept making money, kept failing to find elephants, and ended the year with $128 billion in cash while critics asked why Buffett would not give it back.

2019: Ignore the 1,900% net income headline

A strong stock market made GAAP net income explode. Buffett called it nonsense again. Operating earnings after-tax: $24 billion, down 3% from 2018. That is the real year.

Insurance earned $417 million underwriting profit (year sixteen of seventeen profitable). Float hit $129.4 billion. GEICO shined with a $1.5 billion underwriting gain. Reinsurance still lost money on paper because retro and annuity lines carry deferred charge drag. Cash flow told a better story: retro reinsurance paid out $909 million against $624 million in premiums, net $225 million out the door on a float pool worth tens of billions.

Railroad and utilities grew profits. MSR was roughly flat overall with mixed sub-segments. Lubrizol took a hit from a plant fire in France (insured partly by Berkshire itself). PCC faced Boeing 737 MAX headwinds. McLane clawed back some margin.

No major acquisitions. A $10 billion Occidental Petroleum preferred deal (8% yield plus warrants) soaked up some cash. Berkshire sold a net $5.4 billion of equities excluding that preferred. Trimmed Apple slightly. Sold most of Wells Fargo. Added to Bank of America and JPMorgan.

Share repurchases: $5 billion, about 1% of shares. Buffett said they only bought when price was below intrinsic value, but not a “screaming bargain.” Mead’s valuation work suggested ~$644 billion intrinsic value vs. ~$545 billion implied repurchase price. Room there, but Buffett stays picky.

Berkshire even issued Japanese yen bonds ($4 billion) while sitting on record cash. Cheap funding when available, regardless of immediate need. Classic balance sheet management.

Kraft Heinz and the control group pain

Kraft Heinz took a large impairment. Berkshire’s 26.8% stake hurt reported earnings. This is why the “control group” grove in Buffett’s forest matters. Partial ownership of troubled food brands can swamp good results elsewhere in a given year.

Succession and governance hints

Abel and Jain as vice chairmen. Combs and Weschler on investments. Howard Buffett floated as non-executive chairman to guard culture. The CEO pick looked like Greg Abel to most observers (capital allocation experience, younger than Jain).

The cash pile made succession more urgent in headlines than in operations. Whoever runs Berkshire next inherits a fortress and a parking lot full of cash in a expensive market.

Half-decade review: 2015-2019

Mead compares this five-year stretch to the prior decade:

• Net worth grew $184 billion vs. $154 billion in 2005-2014
• Operating earnings contributed 52% of equity growth (61% if you strip the 2017 tax gain)
• Stock market gains raised unrealized appreciation’s share of growth
• Acquisitions slowed because prices were high

Big deals in the period:

• Van Tuyl Automotive ($4.2 billion, 2015)
• Precision Castparts ($33 billion, 2016)
• Pilot Flying J stake ($2.8 billion, 2017)
• Medical Liability Mutual ($2.5 billion, 2018)
• $7.9 billion in bolt-ons across subsidiaries

Plus Kraft merger equity, Duracell split-off, and $32 billion in growth capex (mostly BNSF and BHE).

Float grew from $81 billion to $126 billion average. The 2017 AIG retro premium was the largest float injection. GEICO kept taking share (13.6% by 2019).

BNSF and utilities generated over a third of after-tax operating earnings in the half-decade. Insurance underwriting profits paused only in 2017.

Share repurchases totaled about $6.4 billion for 2015-2019. Still modest relative to cash generated.

The 2019 mood

Berkshire was patient in the longest bull market in U.S. history. That patience frustrates people who want action. Mead’s read: the constraint is price, not ideas. Buffett would rather hold cash than overpay.

Operating businesses still compound. Apple worked. Occidental preferred worked. Repurchases nibble at undervaluation. But the elephant gun stayed mostly quiet after PCC.

Chapter 10 steps back from annual data to ask why this structure worked at all, and why copycats mostly fail.

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