Berkshire Hathaway's 2021 vintage is like a good bottle whose consumption will undoubtedly delight fans and admirers of Warren Buffett, chairman and CEO of the company he runs with his right-hand man Charlie Munger.
The legendary investor delivered the 2021 earnings for his company on Saturday, which revealed that its economic activity was dynamic, even in very good health at the end of the pandemic.
And Berkshire Hathaway (BRK.A), which had bet on the rebound in growth by buying shares of cyclical companies, is one of the big winners.
The company, whose profits come mainly from the companies it owns, posted net profit of $89.8 billion in 2021, up 111,1% year-on-year.
The conglomerate used these profits to pamper shareholders. In all, it bought back a total of $27.1 billion worth of shares for 2021. About $6.9 billion was bought in the fourth quarter.
At $27.1 billion, Berkshire Hathaway sets a new annual record in terms of share buyback program since 2018, when the conglomerate became aggressive in terms of share repurchase. The previous record was $24.7 billion in 2020. There was, however, a slowdown in the fourth quarter compared to the third quarter when Berkshire Hathaway spent $7.6 billion on share buybacks.
'Easiest' Way to Increase 'Wealth'
"Our final path to value creation is to repurchase Berkshire shares," wrote Warren Buffett, in his traditional annual letter to shareholders. "Through that simple act, we increase your share of the many controlled and non-controlled businesses Berkshire owns."
He added that share buybacks is "the easiest and most certain way for us to increase your wealth" when "the price/value equation is right."
"Alongside the accretion of value to continuing shareholders, a couple of other parties gain: Repurchases are modestly beneficial to the seller of the repurchased shares and to society as well," defended Buffett.
He then set out to explain the logic leading Berkshire Hathaway to choose share buybacks rather than mergers and acquisitions, for example.
"Periodically, as alternative paths become unattractive, repurchases make good sense for Berkshire’s owners," said the iconic investor.
"During the past two years, we therefore repurchased 9% of the shares that were outstanding at yearend 2019 for a total cost of $51.7 billion. That expenditure left our continuing shareholders owning about 10% more of all Berkshire businesses, whether these are wholly-owned (such as BNSF and Geico) or partly-owned (such as Coca-Cola and Moody’s)."
Berkshire Hathaway owns businesses like insurance (Geico), railroads (Burlington Northern Santa Fe) and utilities (PacifiCorp), and has stakes in several high-profile companies (Apple (AAPL), Coca-Cola (KO), Bank of America (BAC), Chevron (CVX), American Express (AXP), General Motors (GM).)
"I want to underscore that for Berkshire repurchases to make sense, our shares must offer appropriate value," Buffett insisted. "We don’t want to overpay for the shares of other companies, and it would be value-destroying if we were to overpay when we are buying Berkshire."
"As of February 23, 2022, since yearend we repurchased additional shares at a cost of $1.2 billion. Our appetite remains large but will always remain price-dependent."
A Big War Chest
Profitable companies have different ways of remunerating their shareholders. The payment of dividends is the most widespread, but companies can also opt for buyback programs for their shares.
Shareholders benefit indirectly from these buybacks since the idea is to reduce the number of shares in circulation so as to boost the value of the remaining shares.
Furthermore, share buybacks are often seen as a sign of confidence in the company.
"As it happens, repurchases automatically increase the amount of 'float' per share," Buffett pointed out. That figure has increased during the past two years by 25% – going from $79,387 per 'A' share to $99,497."
"A meaningful gain that, as noted, owes some thanks to repurchases," He concluded.
Berkshire Hathaway ended the year with a cash pile of $146.72 billion, not far from the record $149.2 billion set in the third quarter.
Berkshire Hathaway will hold its traditional annual shareholders meeting in person on April 30 in Omaha.
