You know him as a stock market genius. He's the best stock picker to ever live -- and he makes it look so easy. He's the king of value investing. The Oracle of Omaha. The godfather of sexual metaphors.
But there's much more to Warren Buffett's company, Berkshire Hathaway
So much more than stocks
Berkshire is broken up into three major operating segments:
- Insurance and investments
- Utilities and energy
- Finance and financial products
First, here's how each segment contributes to the bottom line.
|
Segment |
2009 Revenue |
2009 Earnings* |
Percentage of Earnings* |
|---|---|---|---|
|
Insurance and Investments |
$92.8 billion |
$5.6 billion |
48.14% |
|
Utilities and Energy |
$11.4 billion |
$1.5 billion |
13.23% |
|
Financial Products |
$8.3 billion |
$4.5 billion |
38.63% |
|
Total |
$112.5 billion |
$11.6 billion |
100% |
*Pre-tax earnings. Net income for 2009 totaled $8.1 billion.
And now here's how each segment contributes to the balance sheet.
|
Segment |
Assets |
Liabilities |
Percentage of Total Assets |
|---|---|---|---|
|
Insurance and Investments |
$223.3 billion |
$90.2 billion |
75.16% |
|
Utilities and Energy |
$44.8 billion |
$25.5 billion |
15.07% |
|
Financial Products |
$29 billion |
$26.4 billion |
9.77% |
|
Total |
$297.1 billion |
$161.3 billion* |
100% |
As of Dec. 31, 2009.
*Total includes some un-allocated liabilities.
With the numbers out in front, let's talk about each one of these segments.
1. Insurance and investments
Insurance is Berkshire's largest and most important line of business.
In this year's letter to shareholders, Buffett said insurance "has been the engine behind Berkshire's growth and will continue to be. It has worked wonders for us." Understanding why gets to the heart of Berkshire's success.
When you pay your monthly car insurance premiums, those premiums go toward paying claims on potential accidents you might get in down the road -- plus a little profit for the insurer. The key here is the down the road part. Since insurers collect money up front for future losses, it gets to hold onto your money, or "float" it, sometimes for many, many years.
It's like an interest-free loan. And Berkshire can use that interest-free loan to finance its well-known investments. That's a major contributor to its success -- and it's something you and I can't do.
Most of those well-known investments are thus housed in the insurance segment's balance sheet. As of Dec. 31, here are its top 10 common-stock holdings:
|
Company |
Shares Owned (Millions) |
Value (Billions) |
% of Company Owned |
|---|---|---|---|
|
Coca-Cola |
200 |
$11.4 |
8.6% |
|
Wells Fargo |
334 |
$9.0 |
6.5% |
|
American Express |
152 |
$6.1 |
12.7% |
|
Procter & Gamble |
83 |
$5.0 |
2.9% |
|
Kraft Foods |
130 |
$3.5 |
8.8% |
|
POSCO |
4 |
$2.1 |
5.2% |
|
Wal-Mart |
39 |
$2.1 |
1.0% |
|
BYD Co. |
225 |
$2.0 |
9.9% |
|
sanofi-aventis |
25 |
$2.0 |
1.9% |
|
ConocoPhillips |
38 |
$1.9 |
2.5% |
2. Utilities and energy
Berkshire owns two U.S. utility companies -- MidAmerican, and PacifiCorp. The utilities category also now houses its newest baby, railroad giant Burlington Northern.
Oddly, Berkshire's utilities generate basically zero cash. Rather than paying a dividend to the parent company, all of MidAmerican's profits have been used for capital expenditures. Buffett explained this, saying the expenditures are to "not only prepare for the future but also make these operations more environmentally friendly." This is truly a long-term play.
Most utilities could never get away with this. Their shareholders demand handsome dividends due to the slow-growth nature of the industry. They want money now. But since Berkshire can focus its sights further down the road, its utility subsidiaries can invest faster and more meaningfully than competitors. That's a huge long-term advantage.
3. Finance and financial products
The most notable part of this segment is a set of derivative bets made on the success of global stock markets.
When markets were still booming in years past, Berkshire made bets that global stock indices wouldn't fall below then-current levels 10 or 20 years down the road. In exchange, counterparties on the other side of the trade paid Berkshire about $5 billion in premiums.
Then late 2008 happened, stocks went schizophrenic, and the bets looked like they could end up costing Berkshire tens of billions of dollars.
Now, this would only happen if global markets didn't recover for a decade or two -- a far-fetched scenario even during the depths of 2008. But it gets better. Thanks to the counterparties' hedging quirks, Buffett renegotiated the contracts to "strike" at lower levels in exchange for dropping the expiration date. This was like a mulligan for Berkshire shareholders, and dramatically reduced the risk of loss. Free money care of Mr. Stupid Accounting Rules.
Through it all, Buffett's outlook hasn't budged. "I expect our contracts in aggregate to deliver us a profit over their lifetime, even when investment income on the huge amount of float they provide us is excluded in the calculation." That's not a lofty expectation when you can bargain so easily with your counterparties.
Buffett has incredible advice to offer individual investors. Listen to it. Learn from it. Just don't forget that most of what Berkshire does, individual investors can't.
