Earlier this month, Warren Buffett’s investment conglomerate Berkshire Hathaway Inc. published its financial statements for the second quarter (Q2) of 2023. The company always publishes its results on a Saturday to allow investors sufficient time to analyse the key highlights before the market opens for trading.
As the US stock market resumed operations on Monday, August 7, Berkshire Hathaway’s share price rose to a new record high, giving it a market capitalisation of just under USD800 billion. As of last Friday, Berkshire ranked as the sixth-largest company in the S&P 500 Index, just above Meta Platforms Inc.
Berkshire has two classes of shares. The Class A share price hit an all-time high of USD553,101, surpassing the previous all-time high in March 2022. Class B shares are more popular among retail investors due to their much lower denomination. In a similar manner, the price of Class B shares also hit a new record of USD363.73 earlier this month.
On August 5, Berkshire Hathaway published its Q2 results as of June 30, 2023. Although the company attracts a lot of media coverage due to its sizeable investment portfolio composed of large stakes in various well-known companies, Berkshire also fully owns various companies that are not given as much attention, such as Geico insurance, BNSF Railway, Duracell, and Dairy Queen. The financial statements therefore show the operating results of the full-owned companies as well as any investment gains and/or losses on the portfolio, which can be very material indeed and sway the reported profit from one period to the next.
Investors need to gauge the attractiveness of an investment in an equity not purely from a dividend return but from the returns that the company can generate, which over the long-term is generally reflected in the share price
During Q2, operating earnings from the various companies Berkshire fully owns rose 6.6% year-on-year to just over USD10 billion. This was partly driven by the company’s car insurance unit Geico which posted a second consecutive quarterly profit after more than a year of losses.
Meanwhile, Berkshire reported an unrealised gain of almost USD26 billion from its investment portfolio, which rose to USD353.4 billion. A large portion of this gain came from its very large stake in Apple. The latter’s share price climbed nearly 18% in Q2, resulting in Berkshire’s stake increasing to USD177.6 billion.
As of July 2023, roughly 75% of Berkshire’s investment portfolio was concentrated in only five companies, namely Apple Inc (USD174.5 billion), Bank of America Corporation (USD30.55bn), American Express Company (USD26.5bn), The Coca-Cola Company (USD24.07bn) and Chevron Corporation (USD20.89bn).
The improved operating performance and the sharp upturn in unrealised gains helped Berkshire’s profitability to rise to USD35.9 billion in Q2 (USD71.4bn in the first half [H1] of 2023) compared to a ‘loss’ of USD43.6bn in the comparative period last year (loss of USD38bn in H1 2022) largely on account of the sharp downturn in equity markets in the first half of 2022.
Another component of the financial statements that was given lots of attention by financial analysts and journalists is the idle cash available at the company’s disposal for additional investments. As of June 30, 2023, Berkshire’s cash balance grew to USD147 billion, compared to USD130.6bn at the end of March 2023. Berkshire was a net seller of USD8 billion worth of shares in Q2 as it reported total disposals of USD12.6bn and purchases of USD4.6bn during the period.
Apart from providing the ammunition to acquire large minority stakes or companies outright, the idle cash is currently generating a good return in view of the elevated interest rate environment. In fact, the company reported that most of the cash is invested in short-term Treasury bills, which is estimated will generate investment income of circa USD5 billion this year.
An interesting aspect for Maltese investors who generally only view equities from their dividend-generation aspect is that Berkshire Hathaway does not distribute dividends to its shareholders. Instead, the company conducts regular share buybacks when it believes the share price does not fully reflect the true worth of the company. Over the past three years, the company repurchased USD60 billion worth of its share capital. This reduced the total outstanding shares by just over 10%.
Investors need to gauge the attractiveness of an investment in an equity not purely from a dividend return but from the returns the company can generate, which over the long term is generally reflected in the share price. Berkshire’s book value per share, which is a good proxy for measuring changes in the company’s intrinsic value, rose 6.4% in Q2. More interesting is the book value’s growth since 1965 when Buffett took over as chairman and CEO. Berkshire’s book value increased at a compound annual growth rate (CAGR) of circa 18.3% between 1965 and 2022. This is one of the main reasons why he is regarded as one of the most successful investors.
The growth in the book value has been reflected in the share price. Berkshire shares have generated a 19.8% annualised gain between 1965 and 2022, which is far higher than the return of the S&P 500 index. Cumulatively, the share price has risen 3,787,464% since Buffett took over in 1965. Buffett has a 15% stake in the company, which is now worth almost USD120 billion.
In view of its stellar performance over the years, the company is widely followed by various analysts. Following its recent publication of financial results, a number of analysts agreed that despite the rally in its share price to record levels, Berkshire remains “an attractive play in an uncertain macro environment” with “further potential growth in profitability on the back of higher interest rates and additional investment activity”.
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