Berkshire Hathaway’s annual report is probably the world’s most widely read corporate document.

The Warren Buffett-led company is the fourth largest stock exchange listed entity in the United States – after Apple, Google and Exxon Mobile – but most people download a copy of the report to read Buffett’s letter to shareholders rather than to scrutinise the financial figures.

The company’s 2014 annual report, which was released last week, disclosed net earnings of US$19.9 billion for the December 2014 year and total assets of US$526.2 billion.

It proudly shows that the Berkshire Hathaway share price has appreciated 1,826,163 per cent since Buffett gained control 50 years ago. The company’s current share price is US$219,900, it has a sharemarket value of US$352 billion and is 2.8 times larger than the New Zealand Government in total asset terms.

But investors are not greatly interested in these figures, they are much more attracted to Buffett’s words of wisdom which are trawled over by investors and the media. Buffett will be in the spotlight again on Saturday May 2 when over 39,000 are expected to attend Berkshire Hathaway’s annual meeting in Omaha, Nebraska.

Berkshire Hathaway was formed in 1955 from a merger between Berkshire Fine Spinning and Hathaway Manufacturing.

Berkshire accounted for about 25 per cent of the United States’ fine cotton textile production while Hathaway manufactured synthetic and cotton textiles. Buffett started buying Berkshire Hathaway shares in December 1962 when they were selling for just US$7.50 compared with a net book value of US$20.20 a share. By May 1965 he owned 38.6 per cent of Berkshire and gained control at the May 1965 board meeting. He quickly appointed Ken Chace as chief executive.

Buffett wrote his first letter to shareholders in November 1965, under the name of Chace, and noted that the company had achieved a net profit of US$2,279,206 for the year ended October 2, 1965.

Berkshire paid its first and only dividend – US10c a share – on January 3, 1967 and two months later bought its first insurance operations, National Indemnity and National Fire and Marine Insurance.

In 1970 Buffett was appointed chairman of Berkshire and in March 1971 he wrote the first letter to shareholders under his own name.

Berkshire’s progress over the following five decades has been spectacular.

The company reported net earnings of US$4.7 million for the December 1975 year and its share price closed at US$41.

Net earnings had increased to US$435.8 million by the December 1985 year and its share price finished that year at US$2430.

By 1995 net earnings had risen to US$725.2 million and the share price to US$32,100.

Ten years later, in 2005, net profit after tax had increased to US$8.53 billion and the company’s share price closed the year at US$88,620.

The latest Berkshire annual report reveals that the company’s net book value has risen from US$19 to US$146,186 per share over the past fifty years. The current US$219,900 share price is a substantial premium to the net book value of US$146,186 per share because Berkshire now owns a large number of operating businesses that are valued at cost.

Buffett argues that the gap between the book value and the share price was much closer in the past because the company’s balance sheet had a much higher percentage of listed securities and these were valued at market values.

He wrote in the latest annual report that “many of these [operating subsidiaries] are worth far more than their cost-based carrying value. But that amount is never revalued upward no matter how much the value of these companies increased. Consequently, the gap between Berkshire’s intrinsic value and its book value has materially widened”.

Berkshire’s main operating activities are its insurance subsidiaries, which reported pre-tax earnings of U$7 billion for the December 2014 year. This is followed by BNSF (formerly known as Burlington Northern and Santa Fe Railway), with pre-tax earnings of US$6.2 billion, and its manufacturing operations with earnings of US$4.8 billion.

These three divisions accounted for nearly three-quarters of Berkshire’s pre-tax earnings in the 2014 year.

Insurance has produced twelve consecutive years of underwriting profits but BNSF lost market share to Union Pacific, the other major US railroad company, in 2014. United Pacific’s earnings also beat BNSF’s earnings by a record amount last year.

Buffett is a great fan of railways as he argues they are extraordinarily fuel-efficient and environmentally friendly. He wrote that railroads carry “a tonne of freight about 500 miles on a single gallon of diesel fuel [while] trucks taking on the same job guzzle about four times as much fuel”.

Berkshire’s sharemarket investments were worth US$117.5 billion, or 22.3 per cent of total company assets, as at December 31, 2014. Its largest investments by value are Wells Fargo, with Berkshire owning 9.4 per cent, Coca-Cola (9.2 per cent), American Express (14.8 per cent) and IBM (7.8 per cent).

One of Berkshire’s unique features is that it has 340,499 employees but only 25 in its head office.

Buffett described his philosophy as follows: “While Charlie [vice chairman Charlie Munger] and I search for new businesses to buy, our many subsidiaries are regularly making bolt-on acquisitions. Last year was particularly fruitful: We contracted for 31 bolt-ons, scheduled to cost US$7.8 billion in aggregate. This means no more work for us, yet more earnings. We will make many more of these bolt-on deals in future years.”

Buffett wrote in his March 2013 letter that he does not believe Berkshire should pay a dividend because it has plenty of acquisition and bolt-on opportunities. He argues that BNSF, which was acquired in 2010, has added significantly greater shareholder value than any dividend or share buyback.

Buffett wrote in Berkshire’s latest annual report that the company’s “ambitions have no finish line” but The Economist criticised Buffett, who will be 85 this year, and Munger, who was 91 in January, for not clearly outlining their succession plans.

Buffett’s next big commitment is the May 2 annual meeting. He wrote in the latest annual report: “Last year’s attendance of 39,000 set a record, and we expect a further increase this year as we celebrate our Golden Anniversary. Be there when the doors open at 7am.”

The day starts at 6.20am when two Texas longhorns, each weighing more than a tonne, march down 10th Street in Omaha, followed by four horses pulling a Wells Fargo stagecoach.

At 7.30am there will be an International Newspaper Tossing Challenge, partially to acknowledge Buffett’s role as a newspaper boy in his teenage years, and a new Berkshire movie will be shown at 8.30am.

The question and answer session with Buffett and Munger will begin at 9.30am and end at 3.30pm with a short break for lunch after noon. This six-hour session is the highlight of the year for most Buffett devotees.

Berkshire’s annual meeting will begin at 3.45pm and last only a half hour or so.

Adjoining the the meeting will be an 18,051sq m hall where products from dozens of Berkshire companies will be for sale.

Last year 1385 pairs of Justin boots were sold (one pair for every 28 annual meeting attendees), 13,440 pounds of See’s candy, 7276 pairs of Wells Lamont work gloves and 10,000 bottles of Heinz ketchup.

Buffett is a great salesman, as well as a superb investor. He has certainly convinced a sceptical investment community that conglomerates can deliver outstanding returns for shareholders.


Brian Gaynor

Portfolio Manager