How time flies. When Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) files its shareholder letter and annual report on Saturday, it will mark the 54th year in which Warren Buffett has served as the conglomerate's chairman and CEO.
Here are five things shareholders should be watching carefully when Berkshire reports earnings and distributes its shareholder letter this weekend.
1. Capital plans
What will Berkshire Hathaway do with all its cash? We already know from its 13F filing that it wasn't particularly active in buying shares of publicly traded companies in the fourth quarter. Though Berkshire added to its bank bets and a few other positions, the purchases were relatively pedestrian considering the company went into the quarter with $104 billion in cash.
It's possible that Buffett used some of its cash to buy the business it knows best: Berkshire Hathaway. Last quarter, Berkshire spent about $928 million to repurchase its own stock, buying shares at an average price of roughly $207 per Class B share.
In the fourth quarter, Class B shares traded as low as $186, which may have enticed Buffett to dial up the buybacks. For what it's worth, Ajit Jain, Berkshire's insurance mastermind, bought roughly $19.9 million of stock in December, suggesting that he saw Berkshire's shares as quite the bargain.
2. The prospects for insurance
Berkshire's insurers will undoubtedly post better results in 2018 than in 2017, when several natural disasters (including three major hurricanes) pounded property and casualty insurers of all kinds. Through the first nine months of 2018, Berkshire's insurance companies have produced pre-tax underwriting results that are roughly $4.9 billion better than through the first nine months of 2017. This year certainly has been better than last year, no doubt about it.
The fourth quarter of the year wasn't without major loss events, as Hurricane Michael struck the Florida coast in early October, and deadly wildfires spread through California in November. The nature of the insurance industry is that there is always something eating up a sizable portion of premiums earned.
Of course, Buffett takes the long view with insurance, measuring his insurers' profitability over multiyear periods rather than a single quarter or year. On that basis, Berkshire's insurance companies have been extraordinary, posting underwriting profits for 14 years in a row until 2017.
Notably, one of Berkshire's portfolio managers seems keen to bet on the industry's prospects. Berkshire added shares of Travelers to its portfolio in the third quarter, and its recent 13F shows that stake was increased again in the fourth quarter.
3. BNSF's earnings power
Thanks to regulatory filings, investors can keep tabs on Berkshire's railroad, BNSF, from week to week. Its weekly carload report filed on Dec. 29 suggests that the fourth quarter was a good one for BNSF, with total carloads and intermodal volume increasing at a healthy 2.6% clip in the fourth quarter compared to the year-ago period.
Since acquiring BNSF, Berkshire has invested heavily in it. Earlier this month, BNSF announced that it planned to spend as much as $3.57 billion on capital projects to maintain and expand its network, up from $3.4 billion in 2018. A sponge for Berkshire's cash, Buffett often explains that the capital intensity of the railroad requires that Berkshire reinvest in excess of its depreciation charges, meaning the railroad generates substantially less cash than it reports in net income, but the returns on capital are still sufficient to make it an attractive business.
In his 2016 letter to shareholders, Buffett wrote that despite the capital intensity required, "Charlie and I love our railroad, which was one of our better purchases."
4. Tax time boom or bust?
As an almost purely U.S. business, Berkshire Hathaway was one of the biggest winners of the 2017 corporate tax cut, which reduced the statutory corporate tax rate from 35% to 21%.
One of the biggest questions for any business, and any investor, is whether U.S.-based companies will be able to capture the benefit of lower taxes over the long haul, or if the drop in corporate taxes will be competed away as businesses slowly reduce prices, effectively passing on the benefit of lower taxes to their customers.
Berkshire's regulated utility businesses, for example, are obligated to pass on the benefit of lower U.S. corporate income taxes to their customers, since rates for energy are generally set by regulators to target a certain return on equity. For businesses that have more pricing power, such as Berkshire's Precision Castparts, retaining the benefit of lower taxes is more likely than at...say, Nebraska Furniture Mart, which operates in the highly competitive retail industry.
Predicting the future is difficult, if not impossible, but as an avid Buffett follower, I'd like to learn more about what the world's best investor thinks about the prospects for certain businesses (and Berkshire especially) to benefit from lower corporate taxes three, five, or even 10 years from now.
Check out all our earnings call transcripts.
5. Firming up succession plans
Buffett and Charlie Munger often joke that the actuarial tables suggest they won't be around to lead Berkshire for much longer, but they have yet to give the markets much insight into their succession plans.
We know that Todd Combs and Ted Weschler together manage at least $25 billion of Berkshire's wealth, and will likely take over the management of Berkshire Hathaway's portfolio of publicly traded stocks. Earlier this year, Ajit Jain was named vice chairman of insurance operations. Greg Abel was named as vice chairman of noninsurance operations. At 56 years old, Abel is believed by many to be the front-runner for the next head of Berkshire.
Berkshire is unusual in many ways, but that it hasn't shared the full succession plan with its shareholders is probably the most unusual. Who is next in line to run the show is particularly important when you consider that they could inherit the responsibility of deploying as much as $100 billion (if not more) in capital in relatively short order after Buffett and Munger exit.
Let's put that task in perspective: Even after netting out $20 billion for a rainy-day fund, Berkshire has cash in excess of what it spent buying Precision Castparts, Burlington Northern Sante Fe, and General Re combined -- the three largest deals in its corporate history.