Berkshire Annual Report Highlights for 2011
Below are some of the highlights that I picked up from reading the 2011 Annual Report from Berkshire Hathaway. I would recommend reading the full report by yourself as the information provided by Warren Buffett is always worthy of being read.
The primary job of a Board of Directors is to see that the right people are running the business and to
be sure that the next generation of leaders is identified and ready to take over tomorrow.
The per-share book value of both our Class A and Class B stock increased by 4.6% in 2011. Over the last 47 years (that is, since present management took over), book value has grown from $19 to $99,860, a rate of 19.8% compounded annually.
- Berkshire has identified a successor for Warren Buffett and Charlie Munger, but did not state who that person is. They also stated that the board has identified two back up candidates.
- Purchased Lubrizol in September 2011 which is a producer of specialty additives and other chemicals
- In Marketable Securities, Berkshire purchased $10.9 billion of stock in IBM and $5 billion of 6% preferred shares of Bank of America with a warrant to purchase an additional 700 million shares of common stock before September 2021.
- Spent $8.2 billion on PP&E during the year, which broke the highest previous spend by $2 billion. Of that $8.2 billion, 95% was spent in the U.S. on property, plant and equipment. Going forward, Berkshire anticipates spending a majority of PP&E in the U.S.
- Have had 9 consecutive years of profit, meaning the premiums taken in were higher than the costs paid out in insurance claims. Total profit over those 9 years is $17 billion, which is used to spend by Berkshire to increase the business.
Big Four Stocks
- Berkshire has termed the Big Four to their largest four marketable securities positions. 13% of American Express, 8.8% of Coca-Cola, 5.5% of IBM, and 7.6% of Wells Fargo.
- If owned these positions at the start of the year, they would have produced $862 million in dividends, and $2.4 billion of unrealized gains for a total of $3.3 billion.
Mistakes or Bad News
- Purchase of $2 billion of bonds in Energy Future Holdings a few years back. This company was tied to the price of natural gas which has tanked. Wrote down $1 billion in 2010 and another $390 million last year.
- Not a mistake, but Swiss Re, General Electric, and Goldman Sachs paid back the loan to redeem the securities purchased by Berkshire for a total of $12.8 billion. This eliminated a yearly income stream producing $1.2 billion of pre-tax income.
- Housing, which Buffett thought would turn around in 1-2 years, is not getting better. Buffett doesn’t think it will turn around in the 1-2 years, and thinks it is more years out. It will turn around. Berkshire’s businesses that relate to the home ownership industry are depressed and he thinks that’s a major factor of why the economy cannot turn around. Buffett thinks that when the housing equation (supply vs demand) flips, so that growth is once again happening, the unemployment number will fall drastically.
Intrinsic Business Value
Buffett and Munger use the growth of book-value as a proxy for the business growth. So, a per-share book value is calculated, and used to compare the business to previous years, and against the S&P 500 Index. They believe that the per-share book value is a good measure of intrinsic business value for their business. This may not be a good measurement for other businesses, but best suits Berkshire.
Berkshire has 8 subsidiaries, that if individual businesses, would be included in the Fortune 500.
Berkshire stated this year that they would repurchase shares up to a value of 110% of book value. Berkshire was only able to purchase $67 million of shares before the price advanced beyond the 110 of book value.
Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.
Buffett discusses Share Repurchases in this annual report, especially about the value of the share repurchase. A company must follow the two conditions, quoted above, or else it is hurting the shareholder. Many businesses fail the second condition.
The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another.
Buffett states that Jamie Dimon, CEO of JP Morgan, is a great practitioner of the price/value of share repurchases and that everyone should read his annual letters.
When Berkshire buys stock in a company that is repurchasing shares, they hope for two things: 1) That earnings will increase and continue to do so and 2) that the stock underperform the market for a long time as well! This may sound odd, but you need to read the report as Buffett provides an example using IBM. Buffett didn’t always think about the price this way, but he read Benjamin Graham’s The Intelligent Investor, more specifically chapter 8, which changed his mind about price.
Picking up that book was oneof the luckiest moments in my life.
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