Mar 292017
 

I am quoted in a Kiplinger’s article: “6 Stocks That Stand To Gain From Higher Interest Rates” (March 29, 2017).

Berkshire Hathaway

iStock

Symbol: BRK.B

Share price: $174.98

Market cap: $431.6 billion

Dividend yield: 0%

As an owner of insurance companies and an investor in big banks, Warren Buffett’s Berkshire Hathaway will profit from rising interest rates in a number of ways, says David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business who studies Buffett and is a Berkshire shareholder.

”Since Berkshire currently has about $85 billion in cash invested primarily in short-term Treasuries, a [one percentage point] increase in short-term interest rates results in an additional income of $850 million per year for Berkshire,” Kass says. “Furthermore, Wells Fargo, one of Berkshire’s largest equity investments, will benefit from an increase in earnings as interest rates rise. Their corresponding share prices should then also increase.” Berkshire owns about half a billion shares of Wells Fargo (WFC) alone.

The bottom line is that Berkshire’s businesses, which comprise 81% of its assets, and its portfolio of stocks, which account for 19%, will become increasingly valuable as rates rise, says Kass.

 Posted by at 8:09 am
Mar 152017
 

I am quoted in a Kiplinger’s article: “Why Warren Buffett Loves Fed Rate Hikes”.

I am expecting a slow, gradual increase in interest rates over the next two years. After the Federal Reserve raised short term rates (Federal Funds rate) by 1/4% today, and I believe they will again three more times later this year, then interest rates will be 1% higher a year from now.  Federal Funds were at 1/2 – 3/4% (near historically low levels) before today’s rate increase.  Since Berkshire currently has about $85 billion in cash invested primarily in short term Treasuries, a 1% increase in short term interest rates results in an additional income of $850 million per year for Berkshire.  Furthermore, Wells Fargo and Bank of America, two of Berkshire’s largest equity investments, will benefit from an increase in earnings as interest rates rise.  Their corresponding share prices should then also increase.
In a meeting with University of Maryland students on November 18, 2016, Warren Buffett said: “Stocks are cheap if long term rates are at 4%, four to five years from now.”  Currently, the 10 year Treasury is yielding only 2.50%.  In today’s environment, both Berkshire’s businesses (81% of assets) and its equity portfolio (19% of assets) should continue to do fine if interest rates rise gradually as most economists, including myself, are expecting.
This blog post has been published by Investing.com and ValueWalk.
 Posted by at 7:46 pm
Mar 052017
 

Summary

As recently as 1994, Berkshire Hathaway’s equity securities equaled 76% of total assets.

At year-end 2016, Berkshire Hathaway’s equity securities equaled 19% of total assets.

Berkshire’s focus on acquiring businesses has resulted in a conglomerate of 80 companies.

Warren Buffett acquired Berkshire Hathaway (NYSE:BRK.A), a textile manufacturer, in 1965. In 1967, Berkshire paid $8.6 million to buy National Indemnity Company, a small but profitable Omaha-based insurer. In 1985, Buffett shut down the textile business, but retained its corporate name. The property casualty branch of the insurance industry has been the engine that has propelled Berkshire’s expansion since 1967. Since premiums were paid in advance of claims, Berkshire used this “float” along with underwriting profits to grow the company through investments and acquisitions. Subsequent acquisitions of GEICO in 1995 and entry into the reinsurance business, through the purchase of General Re in 1998, substantially added to Berkshire’s stake and float in this industry.

As of December 31, 2016, Berkshire Hathaway had acquired approximately 80 companies within its four major sectors of operations: (1) Insurance, (2) Regulated, Capital Intensive Businesses, (3) Manufacturing, Service and Retailing Operations, and (4) Finance and Financial Products. Berkshire’s largest acquisitions were BNSF (Burlington Northern Santa Fe Railroad) in 2010, Precision Castparts in 2016, Berkshire Hathaway Energy in 1999, Marmon (manufacturer of transportation equipment including rail cars) in 2007, Lubrizol (lubricants) in 2011 and IMC (formerly Iscar – machine tool manufacturer) in 2006.

As these acquisitions were being made, the relative importance of Berkshire’s equity securities as a percentage of total assets has declined substantially. As recently as 1994, Berkshire’s equity securities equaled 76% of total assets. As of year-end 2016, it comprised only 19% of total assets. This ratio dropped sharply in 1998 to 33% from 65% the year before with the acquisition of General Re. Since 2001, Berkshire’s portfolio of equity securities has averaged about 20% of total assets. As of December 31, 2016, Berkshire’s largest equity holdings consisted of: Wells Fargo (NYSE:WFC) valued at $28 billion, Coca-Cola (NYSE:KO) ($17 billion), and International Business Machines (NYSE:IBM) ($13 billion).

From Berkshire Hathaway’s annual reports 1994 – 2016:
(dollars in millions)

Year EndEquity SecuritiesTotal Assets% Equity Securities
1994$16,260$21,33876.20%
199521,10828,71173.2
199627,75143,41063.9
199736,24856,11164.6
199839,761122,23732.5
199939,508131,41630.1
200037,619135,79227.7
200128,675162,75217.6
200228,363169,75216.7
200335,287180,55919.5
200437,717188,87420
200546,721214,36821.8
200661,533248,43724.8
200774,999273,16027.5
200849,073267,39918.4
200956,562297,11919
201059,819372,22916.1
201176,063392,64719.4
201286,467427,45220.2
2013115,464484,13123.8
2014115,529526,18622
2015110,212552,25720
2016120,471620,85419.4

(Note: This blog post has been published by ValueWalk and Investing.com.)

 Posted by at 11:02 pm
Mar 022017
 

At Berkshire Hathaway’s closing price of $266,013 per class A share on March 1, 2017, its price to book value ratio equals 1.55 which approximates its 30 year average of 1.58.   Berkshire’s book value at year end 2016 was $172,108 per class A share.  (Berkshire’s class A shares rose $8,913 per share or 3.47% on March 1.)

Warren Buffett has stated that he would buy back shares at prices below 120% of book value, which currently would equal prices below $206,530 per class A share.

Berkshire’s intrinsic value continues to increase relative to its book value as the percentage of total assets represented by its common stock portfolio declines.  At year end 2016, Berkshire’s investment in equity securities ($120 billion) represented only 19% of its total assets ($620 billion).  By contrast, in Berkshire’s early years, its common stock portfolio represented the overwhelming majority of its assets.

 Posted by at 7:42 am