Warren Buffett’s Berkshire Hathaway posted a 9% decline in 2020 operating income as the billionaire made “no sizable acquisitions” last year, while bumping up share repurchases.
Berkshire’s (BRK.B) operating income in 2020 fell 9% to $21.92 billion year-on-year. Meanwhile, operating income in the fourth quarter of last year increased 14% to $5.02 billion. Furthermore, the investment conglomerate repurchased a stellar $24.7 billion of its own stock last year.
“The math of repurchases grinds away slowly, but can be powerful over time,” Buffett wrote in his annual letter to Berkshire investors on Feb. 27. “The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses.”
However, Berkshire had to take an $11 billion write-down last year, which Buffett admitted was largely due to a “mistake” he made by buying Precision Castparts Corp., a maker of equipment for aerospace and energy industries, back in 2016.
“I paid too much for the company. No one misled me in any way – I was simply too optimistic about PCC’s normalized profit potential,” Buffett wrote in his annual letter. “Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers.”
“PCC is far from my first error of that sort. But it’s a big one,” he added.
Buffet disclosed that Berkshire’s “family jewels” are focused on four investments, which he called the “Big Four”. The largest in value is the conglomerate’s property and casualty insurance operation. The second and third most valuable assets, which he called “pretty much a toss-up at this point” are Berkshire’s 100% ownership of BNSF, the US largest railroad business measured by freight volume, and its 5.4% stake of Apple (AAPL). In the fourth spot is Berkshire Hathaway Energy.
Berkshire started to buy Apple stock late in 2016 and by early July 2018, owned slightly more than 1 billion shares of the iPhone maker, spending $31.1 billion to build the stake, which was worth $120 billion as of Dec. 31.
“Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position,” Buffett said. “Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.”
Berkshire’s class B shares were up more than 5% over the past month and have jumped almost 17% over the past year. (See BRK.B stock analysis on TipRanks)
Morgan Stanley analyst Michael Phillips last month lifted the price target on Berkshire Hathaway B shares to $248 (3% upside potential) from $239, while sticking to his Hold rating.
On TipRanks’ Smart Score ranking, Berkshire Hathaway gets a 3 out of 10, suggesting that the stock is likely to underperform market expectations.