Berkshire Profit Climbs 15% to $6.29 Billion on Investments

Updated on
  • Conversion of Dow Chemical stake generated $1.2 billion gain
  • Precision and Duracell deals helped 2016 manufacturing result

Warren Buffett’s Berkshire Hathaway Inc. said fourth-quarter profit rose 15 percent, fueled by a gain on an investment in Dow Chemical Co.

Net income increased to $6.29 billion, or $3,823 a share, from $5.48 billion, or $3,333, a year earlier, the Omaha, Nebraska-based company said Saturday in a statement. Operating earnings, which exclude some investment results, were $2,665 a share, missing the average $2,717 estimate of three analysts surveyed by Bloomberg.

While Buffett is widely known as a gifted stock picker, Berkshire derives most of its income from the businesses he’s bought during his five decades running the firm. Its dozens of subsidiaries include auto insurer Geico, railroad BNSF, a network of auto dealerships, retailers and electric utilities.

The 86-year-old billionaire keeps adding to the mix. Last year, he completed deals for battery maker Duracell and Precision Castparts, a supplier to the aerospace industry, helping to boost profit in his company’s manufacturing segment.

Full-year net income was $24.1 billion, little changed from the record in 2015. Book value, a measure of assets minus liabilities, climbed to $172,108 per share at the end of December from $163,783 three months earlier. Buffett’s stock picks and takeovers have helped build the figure more than 8,000-fold since he took control of Berkshire in 1965.

Insurance, Railroad

The insurance businesses had a fourth-quarter underwriting gain of $548 million, driven by results at Berkshire Hathaway Reinsurance Group. That compares with $306 million a year earlier. Investment income from the units fell to $889 million from $1.03 billion during the same period in 2015.

The railroad, BNSF, contributed $993 million to quarterly earnings, compared with $1.08 billion a year earlier. Falling demand for hauling energy-related good hurt results in 2016.

“Coal had the largest decline, driven by structural changes in that business as well as competition from low natural gas prices,” Berkshire said in its annual report. “While natural gas prices and the amount of electricity burn will affect the demand for coal in 2017, our long-term demand outlook for U.S. and global coal consumption is lower.”

Energy, Manufacturing

Berkshire Hathaway Energy’s profit rose to $432 million from $423 million a year earlier. The business operates electric grids in the U.K., natural gas pipelines that stretch from the Great Lakes to Texas and power companies in states including Iowa and Nevada.

The manufacturing, service and retail segment, which includes toolmaker Iscar and chemical company Lubrizol, added $1.17 billion to earnings, compared with $1.07 billion a year earlier. Some fourth-quarter results were calculated by subtracting figures for the first nine months from the full-year data provided Saturday.

Buffett tells investors to focus on the earnings from his stable of operating businesses, rather than one-time gains or losses on Berkshire’s securities portfolio. That’s because results can fluctuate widely on investments and derivatives contracts that he entered years ago.

In the fourth quarter, Dow converted Berkshire’s $3 billion preferred stake to more than $4 billion of common stock, resulting in a gain of about $1.2 billion. The investment dates to the chemical maker’s 2009 takeover of Rohm & Haas, a transaction that Buffett helped finance. Berkshire said in its annual report that it sold the Dow common stock by Dec. 31.

Cash, Stocks

Berkshire changed how it lists some holdings on its balance sheet. As of Dec. 31, the firm had about $28 billion of cash and cash equivalents, as well as more than $58 billion of U.S. Treasury bills for a total of about $86 billion. A filing showing Sept. 30 data, which didn’t break out Treasury bills, showed $84.8 billion in cash.

The billionaire accelerated his purchases of stock after the U.S. election. The equity portfolio was valued at $122 billion at the end of the fourth quarter, up from $102.5 billion on Sept. 30. Two of Buffett’s largest holdings, Wells Fargo & Co. and American Express Co., rallied in the last three months of the year. Berkshire also disclosed this month that it sharply increased its stake in Apple Inc. and the four largest U.S. airlines during the period.

Berkshire had a gain of about $1.9 billion on derivatives and investments, helped by Dow Chemical. That compares to a gain of $805 million a year earlier. Buffett has been working to simplify his company’s stockpile of derivatives. In July, he wound down the last contract that provided protection against losses on bonds. Berkshire still has derivatives related to the performance of stock market indexes.

Berkshire increased its headcount by about 1.8 percent in the year to 367,671 employees.

(Updates with full-year results in fifth paragraph, comment on coal in eighth.)
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