- Warren Buffett's Berkshire Hathaway is reaping the benefits of higher interest rates.
- Buffett's company could pocket almost $4 billion in interest and other investment income this year.
Surging interest rates have infuriated Elon Musk, helped trigger a banking crisis, and are threatening to tip the US economy into a recession. Yet they're at least partly a blessing for Warren Buffett's Berkshire Hathaway.
The famed investor's company is poised to pocket almost $4 billion in interest and other non-dividend income from US Treasuries and similar bets this year. James Shanahan, a senior equity research analyst at Edward Jones, shared that estimate with Insider.
"There is no doubt that Berkshire's investment income has benefited from rising short-term interest rates," Shanahan said.
However, he noted that soaring rates have weighed on revenues and profits in several Berkshire businesses, including its real estate brokerages, homebuilders, auto dealers, and building-product companies.
Shanahan's forecast of $3.7 billion in interest and other investment income (I&OII) this year is more than double the $1.7 billion that Berkshire made from that source in 2022. Moreover, it's around six times higher than the roughly $600 million the conglomerate collected in 2021.
Berkshire earns interest and other income from its cash and cash equivalents, Treasuries, and other fixed-maturity securities. Short-term US Treasury bills accounted for about 55% to 60% of the company's total I&OII last year, Shanahan said.
Berkshire's income from Treasuries has soared largely because of the sharp rise in interest rates over the past 12 months. In a bid to curb historic inflation, the Federal Reserve has hiked its benchmark rate from virtually zero to over 4.5%, and penciled in further increases. Higher rates have translated into larger yields on government bills and bonds.
Berkshire also benefited from the completion of its Alleghany acquisition last year, as it gained ownership of the insurer's interest-generating assets.
Buffett's company had a $150 billion portfolio of cash and fixed-income securities yielding 2.6% at the start of this year, Shanahan estimated. The investor and his team like to keep their cash in safe, relatively liquid assets until buying opportunities arise.
"Berkshire has long used basically nothing but US Treasuries to park its cash," Adam Mead, the author of "The Complete Financial History of Berkshire Hathaway," told Insider.
"Buffett values the certainty of access to the capital far above any incremental yield that might be earned with bank deposits or other instruments," Mead added.
The Berkshire chief and his team struggled to find bargains during the first two years of the pandemic. Stocks soared, private equity firms and special-purpose acquisition companies (SPACs) bid up the price of acquisitions, and Berkshire's rising share price made buybacks less compelling.
However, Buffett's luck changed last year. Berkshire managed to spend a record $68 billion on stocks last year, or $34 billion on a net basis. It also scooped up Alleghany for about $12 billion, and spent another $8 billion on share repurchases — although that was down from over $20 billion in both 2020 and 2021.