With $21.66 Billion in Q1 Net Income, Berkshire Hathaway's Share Buybacks Remain Muted

This weekend marked the “Stockpalooza” event for investors, which of course is the annual meeting for Berkshire Hathaway Inc. (NYSE: BRK-A). Warren Buffett and team had reported a dismal fourth quarter to end 2018 during that huge market sell-off, but the first quarter of 2019 appears to be a reversal of fortune for the better. Net income was $21.66 billion for the first quarter.

To get to net income at Berkshire Hathaway, Warren Buffett has historically said that the company’s net income is not really a proper way to value the company because those numbers can swing wildly based on certain operating performance of insurance and because the investments and derivatives can swing so much. That said, Buffett and Co. saw investment and derivative gains of $15.5 billion in the first quarter, and operating earnings from the companies within the holding company came to $5.555 billion (versus $5.29 billion a year ago).

Within operations that the company has, insurance investment income was $1.24 billion and underwriting operations saw income of $389 million. The so-called ‘other’ businesses had operating income of $2.2 billion — with $1.86 billion coming from railroad, utilities and energy. At March 31, 2019, Berkshire Hathaway’s insurance float (net liabilities assumed under insurance contracts) was approximately $124 billion and that is about $1 billion higher than the fourth quarter of 2018.

After adding up the cash and cash equivalents with the short-term Treasury bills, Warren Buffett and his team were sitting on $110.5 billion in raw purchasing power (within insurance and related businesses) and $3.65 billion (from railroad, utilities and energy) to make a big acquisition or which could be used to buy back stock — before backing out that $20 billion floor or cushion that Buffett always wants the company to keep on hand.

Berkshire Hathaway’s $10 billion committed to Occidental Petroleum Corp. (NYSE: OXY) is contingent and has not yet been made. That said, Warren Buffett did confirm that one of his portfolio managers has finally bought shares of Inc. (NASDAQ: AMZN) and that the upcoming 13F filing for the first quarter of 2019 would reflect that.

There did appear to share buybacks during the first quarter, but there was a discrepancy in the number of shares calculated using the earnings release data and the 10-Q quarterly filing. For the first quarter of 2019, the average equivalent Class A shares outstanding was 1,639,821 and the average equivalent Class B shares outstanding was 2,459,731,886. Berkshire Hathaway’s 2018 annual report showed that there were 1,643,795 class A shares outstanding and 2,465,692,369 Class B shares outstanding. That is a reduction of 3,974 class A shares and a reduction of 5,960,483 class B shares. Using the value as of the last day of the first quarter, which is not going to generate an exact figure due to timing, would imply a repurchase of almost $1.2 billion in class A shares and roughly the same $1.2 billion in Class B shares.

The figure being used for actual repurchases was roughly $1.7 billion. Charlie Munger did indicate while speaking at the meeting on Saturday that the company was likely to be more liberal with its share buybacks going forward now that the company has loosened up the guidelines.

While the figures above are not exact, the 10-Q filing showed a slight variation with repurchase dates between Feb.26-28 and Mar. 1-29 (as a total of 1,258 class A shares and 6,519,830 class B shares; with an average price of about $303,500 for Class A and about $201 for the Class B).

As of Friday’s close, Berkshire Hathaway’s total market cap was close to $537 billion. There is also a reason that Buffett and his team may be acquiring more bank shares again over share repurchases.

Evaluating the conglomerate structure within Berkshire Hathaway can be quite complicated when you add in close to $200 billion in investments into the mix. The core operating structure includes insurance, financial services, real estate, rail, energy, utilities and other industrials and services. As for the huge investment portfolio, it is hard to classify because it’s a combination of strategies that would be a blend of strategies including private equity, hedge funds, mutual funds, and activist investors all rolled into one.

The Kraft-Heinz Company (NASDAQ: KHC) continues to weigh on Berkshire Hathaway’s investment. In fact, this is likely to continue to weigh on Kraft-Heinz as well. The news release said:

As of May 3, 2019, Kraft Heinz has not filed its 2018 Form 10-K with the Securities and Exchange Commission. In addition, Kraft Heinz has not made its financial statements for the first quarter of 2019 available to Berkshire. Accordingly, Berkshire does not have the necessary financial information to determine its share of the earnings of Kraft Heinz for the first quarter of 2019. As a result, Berkshire’s first quarter 2019 other operating earnings excludes such amount. Berkshire will record its share of Kraft Heinz’s earnings for the three months ended March 31, 2019 during the period that such information becomes available. Other operating earnings in the first quarter of 2018 included $234 million related to Berkshire’s investment in Kraft Heinz.

To show just how vastly different this quarter was with net income of $21.66 billion being aided by an investment and derivative gain of $15.5 billion, here was our own breakdown of the prior quarter’s $25+ billion loss:

Berkshire Hathaway’s fourth quarter of 2018 brought a net loss attributable to shareholders of $25.392 billion, versus fourth quarter of 2017 earnings of $32.551 billion. And for all of 2018, Berkshire Hathaway’s net income was just $4.021 billion, compared with net income of $44.94 billion for all of 2017.

To show just how much the investments dragged down the numbers here, note that Berkshire Hathaway’s operating earnings from its actual companies and subsidiaries was $5.72 billion in the fourth quarter of 2018, versus $3.338 billion for the fourth quarter of 2017. And the annual numbers were better on operating earnings as well, with operating income of $24.781 billion in 2018 over $14.457 billion in 2017.

Berkshire Hathaway’s class A shares closed up 1.1% at $327,765.62 on Friday, versus a 52-week range of $279,410.00 to $335,900.00; and the Class B shares closed up 1.24% at $218.60, with a 52-week range of $184.75 to $224.07.

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