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Birthday : 08/30/1930
Place of birth : Omaha (Omaha) - United States
Biography : Warren Edward Buffett is an American businessperson who has been at the head of 6 different companie

Warren Buffett's Berkshire Hathaway Stock Underperforms the Most Since 2009--2nd Update

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02/22/2020 | 11:11am EDT

By Nicole Friedman

Warren Buffett sought to reassure investors about Berkshire Hathaway Inc.'s long-term future following an underwhelming year for the conglomerate's performance.

The 89-year-old Mr. Buffett, Berkshire's chairman and chief executive, is renowned for his long-term success as a stock investor and deal maker. But in recent years, Berkshire's stock performance has failed to beat the market.

Berkshire's stock rose 11% in 2019 compared with a 31.5% total return in the S&P 500, including dividends -- Berkshire's biggest underperformance since 2009.

Mr. Buffett has long said that investors should focus on companies' long-term performance and ignore shorter-term fluctuations in the stock market.

Some investors have agitated for Berkshire to spend more of its massive cash pile buying back shares or paying a dividend. They have also asked to hear more from Ajit Jain and Greg Abel, the two Berkshire vice chairmen who are leading contenders to succeed Mr. Buffett as CEO.

In his annual letter to shareholders released Saturday, Mr. Buffett mostly skirted the issue of Berkshire's underperformance relative to the broader market. But he said shareholders should not be worried about the future of Berkshire after he or his 96-year-old business partner, Berkshire Vice Chairman Charlie Munger, die.

"Your company is 100% prepared for our departure," Mr. Buffett said.

He also said that at Berkshire's annual meeting in May, shareholders will be able to ask questions of Messrs. Jain and Abel. That is a change from previous meetings, when any comments by Berkshire leaders besides Messrs. Buffett and Munger have been rare.

"I'm so excited for that. I think it's an absolutely terrific idea," said Thomas Russo, partner at Gardner Russo & Gardner, a longtime holder of Berkshire shares. He said it would be helpful for shareholders to hear more directly from Messrs. Jain and Abel about overseeing the day-to-day operations of Berkshire's companies.

Berkshire increased its buybacks in the fourth quarter to $2.2 billion, bringing its total repurchases for the year to $5 billion, the company said. That still barely dented the company's huge pile of cash, which totaled $128 billion as of Dec. 31, the company said Saturday, slightly down from a record $128.2 billion at the end of the third quarter.

In his letter, Mr. Buffett lamented the difficulty of finding attractively priced acquisition targets that are big enough to move the needle for Berkshire.

"The opportunities to make major acquisitions possessing our required attributes are rare," he said.

Berkshire's biggest deal in 2019 was a $10 billion investment in Occidental Petroleum Corp.'s bid to acquire Anadarko Petroleum Corp.

Some of Berkshire's 60-odd subsidiaries completed acquisitions, but those deals tend to be small. Berkshire spent $1.7 billion on bolt-on acquisitions in 2019, the company said, up from $1 billion the prior year.

"I think there's more capacity for buybacks," said James Shanahan, senior equity-research analyst at Edward Jones. "It's no doubt that the significant outstanding cash balances have been an extraordinary drag on earnings."

The Omaha, Neb., conglomerate reported net earnings of $29.2 billion, or $17,909 per Class A share equivalent, up from a loss of $25.4 billion, or $15,467 a share, the year before. Berkshire's earnings were mostly boosted by unrealized investment gains, while its results a year ago were dragged down by an unexpected write-down at Kraft Heinz Co.

Berkshire posted operating earnings of $4.4 billion, down from $5.7 billion a year earlier, due to lower results in insurance underwriting and some of Berkshire's smaller operating businesses. Operating earnings exclude some investment results and Mr. Buffett has said they are more reflective of Berkshire's performance than net earnings, which can fluctuate widely due to unrealized investment gains or losses.

Berkshire's Class A shares closed Friday at $343,499, up 1.1% for the year. In contrast, the S&P 500 is up 3.3% this year.

Cathy Seifert, equity analyst CFRA Research, said she thought Mr. Buffett should have addressed Berkshire's results compared with the index more directly. "It's easy to say you're not concerned about short-term performance," she said. But "this short-term underperformance could turn into a longer-term underperformance."

Mr. Buffett also used his letter to discuss corporate boards of directors, which he said are often ill-equipped to oversee companies and incentivized not to challenge executives. Noting that he has served as a director for 21 public companies over the past 62 years, Mr. Buffett complained that board members are often too reliant on their board-related income to truly function as independent overseers. He also said many board members are not experts in finance or investing.

"Almost all of the directors I have met over the years have been decent, likable and intelligent," Mr. Buffett said. "Nevertheless, many of these good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game."

Berkshire runs a large insurance operation as well as railroad, utilities, industrial manufacturers and retailers. Its holdings include recognizable names like Dairy Queen, Duracell, Fruit of the Loom, Geico and See's Candies.

Berkshire's insurance business sits at the core of its moneymaking machine. Insurance brings in billions of dollars of "float," upfront premiums customers pay and that Berkshire invests for its own gain. Berkshire also holds large stock investments, including in Apple Inc. and Wells Fargo & Co.

Write to Nicole Friedman at nicole.friedman@wsj.com

 

Stocks mentioned in the article
ChangeLast1st jan.
APPLE INC. -1.74% 240.59 Delayed Quote.-16.59%
BERKSHIRE HATHAWAY INC. -2.82% 264097.01 Delayed Quote.-20.06%
DJ INDUSTRIAL -2.18% 20924.95 Delayed Quote.-26.61%
FOCUS FINANCIAL PARTNERS INC. -8.66% 18.15 Delayed Quote.-33.42%
NASDAQ 100 -2.11% 7469.726754 Delayed Quote.-10.53%
NASDAQ COMP. -2.25% 7314.708872 Delayed Quote.-14.18%
OCCIDENTAL PETROLEUM CORPORATION -5.09% 12.14 Delayed Quote.-73.94%
S&P 500 -2.17% 2470.15 Delayed Quote.-21.79%
THE KRAFT HEINZ COMPANY 0.77% 24.93 Delayed Quote.-23.31%
WELLS FARGO & COMPANY -4.41% 26.12 Delayed Quote.-49.41%
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