November 26, 2022

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Interest rate hike boosts Warren Buffett's Berkshire Hathaway results

Interest rate hike boosts Warren Buffett’s Berkshire Hathaway results

Warren Buffett’s Berkshire Hathaway quickly became one of the main beneficiaries of a sharp increase in interest rates in the United States, as its fortress-like balance sheet began generating hundreds of millions of dollars in income for the sprawling conglomerate.

The company revealed Saturday that the company’s interest on its $109 billion cash pile nearly tripled from a year earlier to $397 million in the third quarter, noting that the gains were “primarily due to increases in short-term interest rates.” .

Berkshire It keeps the vast majority of its cash in short-term treasury bills, deposits in banks and in money market accounts, as interest rates rose rapidly as the Federal Reserve tightened monetary policy. last week US Central Bank Raising rates to between 3.75 and 4 percent, up from nearly zero at the beginning of the year, and traders expect that rate to reach the highest 5 percent next year.

While the tougher policy has sent shockwaves through the financial markets – even hitting the value of the giant Berkshire stock portfolio – it is finally starting to pay dividends to companies and consumers with cash.

Data from the Investment Company Institute showed that cash stuck in money market funds that cater to retail investors daily has inflated to a record level.

Buffett and Berkshire’s vice president, Charlie Munger, has over the past decade presided over a significant expansion of Berkshire’s cash holdings, which they believe is critical given the potentially catastrophic payments the company’s insurers may need one day.

It was a point underlined by third-quarter results that showed Berkshire suffered a pre-tax loss of $3.4 billion from… Hurricane IanThat killed more than 100 people when it tore parts of Florida. US President Joe Biden has said it will take years, not months, for the region to recover.

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The Berkshire insurance unit suffered an operating loss of $962 million during the quarter, with Geico warning that higher prices for used auto parts and an increase in accidents affected its results.

Column graph of quarterly interest and other income (millions of dollars) showing that higher interest rates are paying off for Berkshire Hathaway

Buffett and Munger have always been able to incur significant losses in their insurance division due to the large “float” – the premiums they collect before eventually having to pay claims on liabilities. The flotation helped support its equity investments and finance the company’s acquisition of companies.

The sell-off in financial markets has hobbled Berkshire’s stock portfolio, which includes large stakes in Apple, American Express, Chevron and Bank of America. The company said the value of its portfolio fell to $306.2 billion from $327.7 billion at the end of June.

Those declines drove it to a net loss of $2.7 billion in the period, or $1,832 per Class A share, from a gain of $10.3 billion the previous year, at $6,882 per share. Buffett has long described the fluctuations in his investment portfolio — which he must admit in profit and loss statements because of accounting rules — as “meaningless.”

Dozens of the companies it owns, which are being widely monitored for signs of the health of the US industrial and commercial complex, revealed the resilience of the US economy while also pointing to a potential slowdown designed by the Federal Reserve. The Berkshire results also showed the effects of inflation and battles over wage improvement as real living standards come under pressure from rising prices.

BNSF Railroad revenue rose 17 percent to $6.5 billion, but profits slipped as the volumes of freight it shipped declined and it paid higher wages to its employees. The railways became a flashpoint earlier this year with more than 30,000 union workers at BNSF threatened to beatopposing circumstances and demanding payment of payment.

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An initial agreement in September handed out benefits to employees and the BNSF said wage costs rose 27 percent in the third quarter of the previous year.

Energy companies in the Berkshire utilities division reported a 17 per cent jump in revenue, boosted by rising energy costs.

But the company’s real estate brokerage unit saw sales tumble by about a fifth, and the unit’s operating profit was down 72 percent from a year earlier as the housing market slowed and fewer homes sold.

Berkshire said higher mortgage rates are also expected to put pressure on a handful of companies in the housing sector. However, during the quarter, those companies — including brick maker Acme and flooring group Shaw — managed to raise prices and posted strong demand.

Overall, operating profit rose to $7.8 billion from $6.5 billion in the previous year. These results have helped generate greater profits in the manufacturing and service lines of business.

Line chart of total return (%) showing Berkshire outperforming both stocks and Treasuries in 2022

Berkshire, which this year bought a 21 percent stake in the energy company Occidental’s common stockrevealed that in the fourth quarter it will start reporting the oil and gas giant’s earnings as part of its results.

The company also said it spent just over $1 billion this quarter buying back its stock.

Class A shares of Berkshire, which are down 4.1 percent this year, have significantly outperformed the market. The benchmark S&P 500 fell 20.9 percent while an investor in US Treasuries lost 15.3 percent, according to Ice Data Services.