(Bloomberg) -- Warren Buffett might have just found his next elephant-sized deal: Buying back his own stock.
Berkshire Hathaway Inc . (NYSE:BRKa) spent $16 billion buying back its stock in the first nine months of 2020, more than triple its previous annual record. The repurchases even surpass many of Berkshire’s biggest investments in recent years, including 2019’s Occidental Petroleum Corp (NYSE:OXY). financing deal, and total more than Berkshire has ever spent in one year buying Apple Inc (NASDAQ:AAPL). stock.
The record buybacks, coupled with investments in Japanese trading houses and deals for natural gas assets, mark a shift from the start of the pandemic, when Buffett, 90, took a more cautious approach and even dumped his stakes in major U.S. airlines. The billionaire investor has long hungered for an “elephant-sized” deal to put huge sums of capital to work but has failed to find lucrative, large acquisitions in recent years.
With a large deal looking unlikely, “share buybacks all of a sudden look like a very pleasant option,” CFRA Research’s Cathy Seifert said.
Buybacks have gotten cheaper too. Shares fell drastically in March and have since started to climb back, but overall Berkshire Class A shares are still down 7.6% this year. Those shares rose 5.8% at 9:36 a.m. in New York.
Berkshire, in its earnings report filed Saturday, also hinted that the buying didn’t stop with the third quarter’s $9 billion haul. Decreased share counts imply Buffett repurchased at least $2.3 billion of stock from the end of September through Oct. 26.
What Bloomberg Intelligence Says
“We believe the large share buyback was a display of conservatism, given the elevated values of targets with diminished earnings expectations and coronavirus uncertainty are impediments to acquisitions.”
--Matthew Palazola, senior industry analyst, and Derek Han, associate analyst
Here are other key takeaways from Berkshire’s third-quarter earnings:
Profit Slump
Berkshire’s businesses were hit by the pandemic in the third quarter, contributing to a 32% drop in operating profit. All of Berkshire’s reporting segments except its energy operation reported lower earnings.
Still, Berkshire’s net income, which is impacted by the swings in its $245 billion equity portfolio, benefited from the stock market’s rally. Investment gains fueled an 82% jump in net income from a year earlier.
Berkshire’s collection of insurers posted their first underwriting loss this year, driven by losses at its namesake groups of primary insurers and reinsurers. The businesses were hit by costs tied to the pandemic as well as losses from Hurricanes Laura and Sally in recent months.
Geico, the company’s auto insurer, reported a nearly 27% drop in pretax underwriting earnings, partially driven by a program to give consumers premium credits because of the pandemic.
Virus Impact
Covid-19 continued to put pressure on Berkshire’s operations. For its insurers, it meant not just claims tied to the pandemic, but also customers failing to pay premiums and higher operating costs with staff scattered. Operations such as the railroad were also hit by ripple effects from the virus and shutdowns.
Still, Berkshire said several of its manufacturing, service and retailing businesses saw significant increases in profit in the third quarter from the previous three months, when they “declined considerably.”
Berkshire’s operations, such as aerospace-parts maker Precision Castparts, have had to furlough or cut workers this year as the virus gripped the nation. Buffett’s company warned in its third-quarter report that some businesses might have to continue to restructure.
“Certain of our businesses are undertaking and will likely continue to undertake restructuring activities that will resize their operations to better fit expected customer demand,” Berkshire said Saturday in the filing.
Cash
Despite Berkshire’s record buybacks and stock investments, the conglomerate’s cash pile was just slightly lower than the second quarter’s record. Berkshire held roughly $145.7 billion in cash at the end of the third quarter, down less than $1 billion from the end of June.
Berkshire’s recently been expanding its hunting horizons, with its $6 billion bet on Japanese trading houses and even a stake in the newly public Snowflake Inc.
“Berkshire just has so much capital, they have to take other bets they’ve never made before and kind of be adventurous,” said Cole Smead, who is president and portfolio manager at Smead Capital Management. “The question is whether they will actually earn negative returns in some of these.”
Energy Gains
Berkshire’s sprawling energy empire was a bright spot in the third quarter. That business posted $1.4 billion of earnings in the period, its highest level in more than a decade as revenue climbed 8.8% from a year earlier.
The biggest contributor was MidAmerican Energy Company, which provides power to customers in Iowa and Illinois. That unit saw a 21% jump in earnings as new wind energy projects delivered tax credits.
The utility business “was a pretty significant contributor to operating earnings,” Jim Shanahan, an analyst at Edward Jones, said in a phone interview. “That business is doing pretty well.”
(Updates shares in fifth paragraph.)
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