5 Key Takeaways From Warren Buffett’s Annual Letter, Berkshire Hathaway Earnings

Berkshire Hathaway’s (BRK.A, BRK.B) cash pile swelled to a record in the fourth quarter of 2023 while earnings soared despite weakness in its railroad and energy businesses, according to its earnings report Saturday.

This was Berkshire’s first quarterly report since Vice Chair Charlie Munger, 99, died in November. Buffett led his much-anticipated shareholder letter with an homage to his right-hand man, dubbing him “The Architect of Berkshire Hathaway.”

Class A and B shares of Berkshire closed at a record on Friday, up almost 17% and 15%, respectively, this year.

Berkshire Cash Pile Hits Record, Earnings Soar

Berkshire reported full-year net earnings of $96.2 billion compared to a loss of $22.8 billion for 2022. But Buffett is loathe to report the figure—he called it “worse-than-useless” in his letter to shareholders—because it includes unrealized gains and losses, that can exceed $5 billion a day, on Berkshire’s massive equity portfolio.

Instead, Buffett prefers operating earnings, which rose to $8.5 billion in the fourth quarter of 2023 from $6.6 billion the prior year. Full-year operating earnings totaled $37.4 billion, a 21% increase from 2022.

Berkshire’s cash and U.S. Treasury holdings rose to a record $167.6 billion at the end of 2023 with $133.4 billion in Treasurys. In the third quarter, the company’s cash hoard had totaled $157.2 billion.

Buffett called the cash and Treasury holdings “far in excess of what conventional wisdom deems necessary,” but extolled the benefits of Berkshire’s conservatism. He noted that during the 2008 financial crisis, Berkshire did not rely on commercial paper, bank lines, or debt markets.

Era Of Eye-Popping Performance Over?

Berkshire is “highly averse” to issuing new shares and that makes it nearly impossible for the company to double its current size over the next five years.

Investors closely watch Berkshire’s cash reserves in anticipation of the company’s next big bet.

However, Buffett said that investment opportunities that fit the bill for Berkshire are getting harder to come by. Within the U.S. there “remain only a handful of companies in this country capable of truly moving the needle at Berkshire” and that “there are essentially no candidates that are meaningful options,” elsewhere in the world.

So as Buffett puts it—”All in all, we have no possibility of eye-popping performance.”

Berkshire in Occidental, Japan for the Long Haul

Berkshire’s most recent 13-F filing showed it added to its existing holdings of Occidental Petroleum (OXY), which Buffett said the firm plans to hold “indefinitely.”

By the end of 2023, the company owned 27.8% of Occidental Petroleum’s common shares and warrants giving them the option to increase their stake at a fixed price. Berkshire does not, however, intend to control Occidental or own it outright.

“We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon-capture initiatives, though the economic feasibility of this technique has yet to be proven,” Buffett said.

Buffett also heaped praise on the five Japanese firms in which Berkshire upped its stakes last year—Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. They have pursued shareholder-friendly policies including prudent stock buybacks, modest dividend distributions, and conservative CEO compensation packages.

“An additional benefit for Berkshire is the possibility that our investment may lead to opportunities for us to partner around the world with five large, well-managed and well-respected companies,” Buffett said.

Berkshire owns about 9% of each company and has agreed with all of them that it will not purchase enough stock to raise its stake above 9.9%.

Utilities, Railroads Disappoint

Buffett called Berkshire Hathaway Energy’s earnings, which declined 40% to $2.3 billion in 2023, a “severe” disappointment.

The company blamed the regulatory climate in a few states for raising “the specter of zero profitability or even bankruptcy.” Losses from forest fires have added to the industry’s woes.

“It is difficult to project both earnings and asset values in what was once regarded as among the most stable industries in America,” Buffett wrote. “When the dust settles, America’s power needs and the consequent capital expenditure will be staggering. I did not anticipate or even consider the adverse developments in regulatory returns and, along with Berkshire’s two partners at BHE, I made a costly mistake in not doing so.”

BNSF Railway was also disappointing. Operating earnings fell 14% to $5.1 billion as revenue declined and wage increases exceeded expectations.

However, Buffett was more optimistic about the railroad’s future. He projected that BNSF’s profit margins, which have slipped since Berkshire’s acquisition in 2010, will improve. “Rail is essential to America’s economic future,” he wrote. “A century from now, BNSF will continue to be a major asset of the country and of Berkshire. You can count on that.”

Insurance Buoys Earnings

Berkshire’s insurance business “performed exceptionally well last year, setting records in sales, float and underwriting profits.”

Insurance investment income surged more than 47% to $9.6 billion in 2023, while the underwriting business swung from a $30 million loss in 2022 to a $5.4 billion profit in 2023.

That comes as little surprise given surging insurance costs. In August, auto insurance costs increased over 19%, at the fastest pace since 1976, driven by pricier cars and rising costs of fixing them. Frequent natural disasters have also pushed up premiums for home insurance.

Other insurers, like The Travelers Companies (TRV) and Allstate (ALL), have also reported a surge in earnings on the back of higher premiums.