Berkshire Hathaway’s operating earnings surge by 28% in the fourth quarter, with its cash reserve reaching a record high

Berkshire Hathaway’s cash reserves reached an all-time high in the fourth quarter of 2023, even as earnings surged despite challenges in its railroad and energy sectors, as indicated in its recent earnings report released on Saturday.

This report marked Berkshire’s first quarterly update since the passing of Vice Chair Charlie Munger in November. Warren Buffett, Berkshire’s Chairman and CEO, honored Munger in his shareholder letter, recognizing him as “The Architect of Berkshire Hathaway.”

Both Class A and Class B shares of Berkshire achieved record highs on Friday, with year-to-date gains of nearly 17% and 15%, respectively.

Berkshire Hathaway’s cash reserve reaches a record high, while earnings experience a significant increase

Berkshire Hathaway disclosed a full-year net profit of $96.2 billion for 2023, a significant rebound from the $22.8 billion loss in 2022. However, Warren Buffett, Berkshire’s Chairman and CEO, expresses reluctance in highlighting this figure, labeling it “worse-than-useless” in his letter to shareholders. He emphasizes that it includes unrealized gains and losses, which can fluctuate by over $5 billion daily due to Berkshire’s extensive equity portfolio.

Buffett instead emphasizes operating earnings, which climbed to $8.5 billion in the fourth quarter of 2023, up from $6.6 billion the previous year. The full-year operating earnings amounted to $37.4 billion, marking a 21% increase over 2022.

Berkshire’s cash reserves and U.S. Treasury holdings surged to a record $167.6 billion by the end of 2023, with $133.4 billion allocated to Treasurys. Buffett acknowledges that this sum surpasses conventional wisdom’s assessment of necessity, yet he underscores the advantages of Berkshire’s cautious approach. He highlights that during the 2008 financial crisis, Berkshire avoided reliance on commercial paper, bank lines, or debt markets.

Is the era of astonishing performance coming to an end?

Berkshire strongly avoids issuing new shares, making it extremely challenging for the company to double its current size in the next five years.

Investors keep a close eye on Berkshire’s cash reserves, eagerly awaiting the company’s next major investment.

Buffett noted that finding investment opportunities that meet Berkshire’s criteria is becoming increasingly difficult. He mentioned that within the U.S., only a few companies have the potential to significantly impact Berkshire, and outside the U.S., there are essentially no viable options available.

Berkshire Hathaway plans long-term investments in Occidental and Japan

Berkshire Hathaway’s latest 13-F filing revealed an increase in its holdings of Occidental Petroleum (OXY), which Warren Buffett stated the company intends to hold for the long term.

As of the end of 2023, Berkshire owned 27.8% of Occidental Petroleum’s common shares and warrants, granting them the option to boost their ownership at a predetermined price. However, Berkshire has no plans to take control or acquire Occidental outright.

Buffett expressed admiration for the five Japanese companies in which Berkshire raised its stakes last year: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. These firms have embraced shareholder-friendly practices such as responsible stock buybacks, modest dividend payouts, and conservative CEO compensation packages.

Furthermore, Buffett highlighted the potential for Berkshire to collaborate globally with these five well-managed and respected companies, presenting an additional benefit of its investment.

Berkshire currently holds about 9% of each company’s stock and has reached agreements with them not to increase its ownership above 9.9%.

Utilities and railroads have underperformed

Buffett expressed deep disappointment with Berkshire Hathaway Energy’s earnings, which plummeted by 40% to $2.3 billion in 2023. He attributed this decline to challenging regulatory conditions in certain states, which have raised concerns of potential bankruptcy due to zero profitability. Additionally, losses from forest fires have compounded the industry’s challenges.

Buffett acknowledged the difficulty in forecasting earnings and asset values in what was previously considered one of the most stable industries in America. He admitted to not anticipating the adverse regulatory returns and described the oversight as a costly mistake.

Similarly, BNSF Railway’s performance was lackluster, with operating earnings decreasing by 14% to $5.1 billion. This was attributed to declining revenue and wage increases surpassing expectations.

Despite the setbacks, Buffett remains optimistic about the railroad’s future, projecting improved profit margins. He emphasized the vital role of railroads in America’s economic landscape, expressing confidence that BNSF will continue to be a significant asset for the country and Berkshire in the long run.

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