Warren Buffett's Berkshire Hathaway sold stocks and slowed buybacks last quarter. Here are 5 key takeaways from its Q2 earnings.
- Warren Buffett's Berkshire Hathaway filed its second-quarter earnings on Saturday.
- The investor's company sold a net $1 billion of stock and slowed buybacks to $6 billion.
- Berkshire also raised its minimum cash reserve and staged a broad-based recovery.
Warren Buffett's Berkshire Hathaway published its second-quarter earnings report on Saturday, revealing it sold more stocks and cut back on share buybacks in the three months to June 30.
The famed investor's conglomerate owns scores of businesses, including Geico, See's Candies, and the BNSF Railway. It also holds multibillion-dollar stakes in Apple, Coca-Cola, Kraft Heinz, and other public companies. Given the scale and breadth of Berkshire's operations, which range from insurance and energy to manufacturing and retail, the company's earnings provided a valuable glimpse at the health of the US economy last quarter.
Here are the five key takeaways from its latest earnings report:
1. Stock sales
Berkshire invested $1 billion in equities and sold $2.1 billion worth, making it a net $1.1 billion seller of stocks last quarter. That compares with net stock sales of $4 billion in the first quarter, suggesting Buffett is growing more comfortable with his current portfolio, but has still erred towards shrinking instead of growing it. It's clear the value investor isn't finding many bargains while the US stock market continues to flirt with record highs.
In 2020, Berkshire sold a net $9 billion of stocks, meaning Buffett and his team have now disposed of $14 billion of equities in the space of 18 months. The company has exited JPMorgan, Goldman Sachs, the "Big Four" US airlines, and other holdings in that timeframe, which suggests five stocks now account for 75% of its stock portfolio's total value of around $300 billion.
Its latest earnings showed that the cost basis of its "commercial, industrial, and other" stock holdings dwindled 10% to $43 billion last quarter. That could mean the company sold more Chevron stock after halving its stake in the energy group in the first quarter, and continued trimming its pharmaceutical holdings or General Motors position in the period.
2. Share buybacks
Buffett's company spent $6 billion on share repurchases last quarter, down from $6.6 billion in the first quarter and about $9 billion in each of the two quarters before that. That downward trend suggests the investor sees Berkshire stock - which climbed around 9% in price last quarter, after jumping 12% in the first quarter - as less of a bargain now than he did six months ago.
Still, Berkshire has now plowed about $37 billion into buybacks in the space of 18 months, dwarfing its outlays of $5 billion in 2019 and $1.3 billion in 2018.
Berkshire appears to have spent another $1.7 billion on repurchases between the end of the quarter and July 26, based on the decline in its outstanding shares over that period. That suggests the company is continuing to spend about $2 billion on buybacks every month.
3. Cash reserves
For more than a decade, Buffett has told shareholders he won't conduct buybacks if they would reduce the value of Berkshire's cash, cash equivalents, and Treasury bills to below $20 billion. He raised that figure to $30 billion in his company's latest earnings report, signaling he wants to maintain a larger safety net than before.
Buffett may still be understating his preferred cash cushion. The investor said at Berkshire's annual meeting in May that the company had $70 billion or $80 billion that he would "love to put to work." Given Berkshire's cash pile totaled about $140 billion at the time, his comment suggests he wants the company to have $60 billion to $70 billion stashed away for a rainy day.
4. Broad recovery
Berkshire reported broad-based growth in the second quarter as the US economy reopened, boosting demand for many of its products and services.
The company's building-products group posted a 29% increase in revenue as demand for home construction, bricks, paint, and carpets soared. The BNSF Railway scored a 26% increase in revenue as freight volumes of consumer, industrial, agricultural, and other products all rose.
The real-estate division's revenue grew by 48% as Berkshire's brokerage and broker-franchise network cashed in on the housing boom. Sales also jumped 29% in the auto-dealer segment, 52% at electronic-components distributor TTI, and 48% at Marmon, an industrial holding company that serves the construction, automotive, and restaurant markets, among others.
On the other hand, Geico's pretax underwriting earnings plunged 70% as Americans returned to the road and auto-insurance claims soared. Precision Castparts also posted lower revenues as demand for aerospace components remained muted.
5. Inflation
Berkshire's latest earnings highlighted price increases in several markets, pointing to higher inflation.
The BNSF Railway's fuel expenses surged 112%, partly due to higher fuel prices, while its coal revenues jumped 42% as energy customers balked at lofty natural-gas prices. Marmon benefited from higher metal prices as it was able to pass them on to customers.
Moreover, Berkshire's building-products group hiked its prices in response to robust demand, and to supply disruptions that drove up the costs of lumber, steel, copper, energy, freight, fixtures, and petrochemical-based materials.