The Reason Warren Buffett and Berkshire Hathaway Inc. Made This $15 Billion Energy Bet

Warren Buffett has poured money into planet-saving investments, yet it won't just help the earth. It'll help his wallet, too.

Jul 14, 2014 at 7:04AM

This “what-will-they-do-with-the-money” factor must always be evaluated along with the “what-do-we-have-now” calculation in order for us, or anybody, to arrive at a sensible estimate of a company’s intrinsic value. That’s because an outside investor stands by helplessly as management reinvests his share of the company’s earnings. If a CEO can be expected to do this job well, the reinvestment prospects add to the company’s current value; if the CEO’s talents or motives are suspect, today’s value must be discounted. The difference in outcome can be huge.”

Warren Buffett recently revealed that Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) has "poured billions and billions and billions of dollars" into his energy business and said "we're going to keep doing that as far as the eye can see." 

For $2 billion in 1999, Berkshire Hathaway acquired a 76% stake in MidAmerican Energy, which it just renamed to Berkshire Hathaway Energy a few months ago. At the time Buffett said: 

We buy good companies with outstanding management and good growth potential at a fair price, and we're willing to wait longer than some investors for that potential to be realized. This investment is right in our sweet spot.

And when discussing the acquisition in the annual letter to Berkshire Hathaway shareholder, he added:

Though there are many regulatory constraints in the utility industry, it's possible that we will make additional commitments in the field. If we do, the amounts involved could be large.

Just this year, Buffett said, the business will have made investments totaling $15 billion in its renewable energies portfolio that and perhaps another $15 billion could be made in the years to come. There's no denying that Berkshire's "additional commitments" have been "large."

But when you consider that these investments came from the same man who once said his preference was to find businesses that require "a minimum of new capital investment," questions surrounding the massive investments begin to rise.

But the aforementioned Buffett quote provides a helpful clue to why the investment has been so big.

The huge difference in outcome
The quote found at the top of the article was made in the 2010 letter to shareholders.

Buffett wants us to see that smart investors consider the "what-will-they-do-with-the-money" factor when making an investment in a business.

A company can really only do only five things with the money it earns: invest in existing operations, acquire other businesses, pay down debt, buy back shares, or issue dividends. And of course, how well companies allocate their capital is the critical wheel that drives the return shareholders see.

And as it relates to Buffett, he prefers to invest in his own business or acquire other businesses.

So why is he pouring all this money back into his energy business instead of acquiring others?

Not only does he believe that this "reinvestment" will "add to the company's current value," but early evidence indicates that it already has, and as a result, the "difference in outcome" was "huge."

The reason for the reinvestment
Buffett had an almost identical paragraph in both the 2012 and 2013 letters to shareholders that read:

Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy. It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects. It is meanwhile in our self-interest to conduct our operations in a way that earns the approval of our regulators and the people they represent.

And when asked why MidAmerican Energy continues to pour money into its operations at the latest meeting for shareholders, its CEO provided a remarkable bit of insight:

Generally we are the lowest-cost provider. We rarely have rate increases. Thus, regulators are very supportive of our projects.

At its core, the investments made by Berkshire Hathaway have been used to satisfy customers and regulators, the two essential groups that dictate the success of its energy operations.

What this all means to investors
I know what you may be thinking: This sounds great in theory, but how has it all worked out in practice, and what does it mean to the bottom line at Berkshire Hathaway?

A simple calculation of pre-tax earnings over revenues reveals that since 2009, profit margins have risen from 13.4% to 14.2%, netting an extra $100 million to Berkshire's bottom line.

In this, we can learn that Buffett may have been wrong -- or at least misleading -- as it's not just customers and regulators that should be happy with these investments. Berkshire Hathaway shareholders need to be happy as well.

Warren Buffett: This new technology is a "real threat"
Buffett clearly will succeed as the energy revolution continues, but there is one thing that scares him. At the recent Berkshire Hathaway annual meeting, Buffett admitted that this emerging technology is threatening his biggest cash cow. While Buffett shakes in his billionaire boots, only a few investors are embracing this new market, which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping on to one company that could get you the biggest piece of the action. Click here to access a free investor alert on the company we're calling the "brains behind" the technology.

Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information