Warren Buffett Gives Thumbs-Up To New Execs, Notes Earnings Impact From Kraft Heinz In Annual Berkshire Hathaway Letter

The market value of Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) grew by 2.8 percent in 2018 and the conglomerate earned $4 billion, outpacing the S&P 500 but down substantially from the prior year’s 21.9-percent growth

The Omaha, Nebraska company’s balance sheet at year’s end included a $3-billion non-cash loss largely caused by Berkshire’s stake of more than 325 million shares in Kraft Heinz Co KHC, CEO Warren Buffett said in his annual letter to shareholders Saturday.

Kraft Heinz took a $15.4-billion writedown on Kraft and Oscar Mayer and announced both a dividend cut and SEC investigation when it released its fourth-quarter report Thursday. 

Berkshire’s annual meeting is Saturday, May 4 in Omaha. 

A Good Problem To Have: Berkshire's Cash Pile 

The 88-year-old CEO reiterated his wish to invest Berkshire’s year-end cash surplus of $112 billion in a company. 

“The immediate prospects for that, however, are not good: prices are sky-high for businesses possessing decent long-term prospects,” Buffett said. 

In 2019, Berkshire is likely to continue expanding its equity holdings, he said. 

“We continue, nevertheless, to hope for an elephant-sized acquisition.” 

The conglomerate maintains at least $20 billion in "untouchable" cash at all times, Buffett said. 

“Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me,” he said. “At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash.”

Top Holdings

Berkshire’s Kraft Heinz holding is carried on its balance sheet at a GAAP figure of $13.8 billion, a figure reduced by the food stock’s large write-off in 2018, Buffett said. The holding had a year-end market value of $14 billion and a cost basis of $9.8 billion, he said. 

As Benzinga reported Friday, Berkshire’s Kraft Heinz investment has been highly unsuccessful, losing more than half its value since it was first made in 2015. When the stock plunged by almost 28 percent Friday, the value of the shares dropped by billions more. 

Berkshire’s five largest equity investments are listed below by percentage stake at year’s end. The list excludes the company’s Kraft Heinz stake, which is held as part of a control group and recorded using a different accounting method. 

  • American Express Company AXP: 17.9 percent
  • Apple Inc. AAPL: 5.4 percent
  • Bank of America Corp BAC: 9.5 percent
  • The Coca-Cola Co KO: 9.4 percent
  • Wells Fargo & Co WFC: 9.8 percent 

Berkshire’s non-insurance holdings earned $20.8 billion in pre-tax income in 2018, 24 percent more than in 2017. Buffett pointed out that the after-tax figure is 47 percent, thanks to a cut in the corporate tax rate during the year from 35 to 21 percent. 

Younger Execs Take Over Operations In 2018

Buffett is the more youthful occupant of Berkshire’s C-suite — Vice Chairman Charlie Munger is 95.

In 2018, Ajit Jain and Greg Abel were elected as directors and Berkshire vice chairmen. Jain is responsible for the insurance business, while Abel oversees the rest. 

While Buffett did not directly address leadership succession in Saturday’s letter, he gave Jain and Abel his vote of confidence. 

“These moves were overdue,” Buffett said. “Berkshire is now far better managed than when I alone was supervising operations. Ajit and Greg have rare talents, and Berkshire blood flows through their veins.”

An ‘Old Testament Style’ Insurance Business

Describing the property and casualty insurance business as the “engine propelling Berkshire’s growth since 1967,” Buffett said the segment posted a $2-billion underwriting profit in 2018. 

That’s in contrast to the segment’s $3.2-billion loss in 2017 due to $100 billion in hurricane-related insurance losses. The year was an exception to the rule for Berkshire, marking the only underwriting loss for the insurance division over a 16-year stretch. 

“That record is no accident: Disciplined risk evaluation is the daily focus of our insurance managers, who know that the benefits of float can be drowned by poor underwriting results,” the venerable CEO said. 

“All insurers give that message lip service. At Berkshire it is a religion, Old Testament style.”

Related Links: 

Berkshire Hathaway's Share Buyback: What You Need To Know

Buffett's Berkshire Hathaway Finds One Place To Deploy Cash Horde: Fintech

Berkshire Hathaway CEO Warren Buffett in 2015. Public domain photo via Wikimedia. 

Posted In: Charlie MungerWarren BuffettEarningsNewsManagementTop Stories

Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on Bankrate.com. The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.

All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the Bankrate.com rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.

Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.

Rate collection and criteria: Click here for more information on rate collection and criteria.