Buffett's Berkshire Profit Jumps to Record $6.4 Billion on Investments

Friday, 01 Aug 2014 05:57 PM


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Warren Buffett’s Berkshire Hathaway Inc. said second-quarter profit rose 41 percent to a record on investments, including a gain tied to the exit of most of his stake in the former publisher of the Washington Post.

Net income climbed to $6.4 billion, or $3,889 a share, from $4.54 billion, or $2,763, a year earlier, the Omaha, Nebraska-based company said in a statement. Operating earnings, which exclude some investment results, were $2,634 a share, beating the $2,482 estimate of three analysts surveyed by Bloomberg.

A rebounding U.S. economy has boosted the value of Berkshire’s stock portfolio and helped propel growth at the dozens of operating business that Buffett, 83, acquired during his four-decade tenure as chairman and chief executive officer. The subsidiaries include insurers, manufacturers, retailers, utilities and one of the country’s largest railroads, BNSF.

“When it’s all said and done, he has a lot of leverage to the U.S.,” said Bill Smead, chief investment officer at Smead Capital Management, which oversees about $970 million, including Berkshire stock.

Berkshire had a gain of $2.06 billion on derivatives and investments, driven by a share-and-asset swap with Graham Holdings Co., which sold the Post to billionaire Jeff Bezos. Post. That compares with a gain of $622 million a year earlier.

In the swap, Buffett turned over more than $1 billion in Graham stock, allowing him to exit the holding without incurring taxes on the gain. The shares had risen more than 100-fold since he bought the stake in the 1970s. In return, Graham turned over cash, a Miami television station and Berkshire shares.

Investment Gains

Net income for the three months ended June 30 surpassed the previous record of $5.13 billion in the fourth quarter of 2005, which was also driven by investments. In that period, Buffett recorded a gain on his holding in Gillette Co. after it merged with Procter & Gamble Co.

Berkshire’s Class A shares have risen 6.4 percent this year in New York, beating the 4.2 percent gain in the Standard & Poor’s 500 Index.

U.S. companies are reporting higher profits, consumer spending is picking up and the job market is strengthening as the country rebounds from the 2008 financial crisis. The gross domestic product rose at a 4 percent annualized rate in the second quarter, bouncing back after winter weather contributed to a contraction in the first three months of the year.

Those trends stand to benefit Berkshire. Most of the businesses Buffett has bought over the years are based in the U.S. and some of the largest holdings in his company’s stock portfolio — like Wells Fargo & Co. and International Business Machines Corp. — are American.

Energy, Ketchup

Buffett has also been adding to Berkshire’s stable of operating businesses. Last year, the energy unit bought Nevada’s largest electric utility for $5.6 billion and Buffett teamed up with buyout firm 3G Capital to take HJ Heinz Co. private.

The Heinz deal gave Berkshire half the equity in the ketchup maker and preferred shares that pay $720 million in dividends annually. Buffett has said that margins should improve as the managers that 3G installed cut costs.

Since the takeover was completed in June 2013, Heinz has eliminated thousands of jobs, announced factory closures and offered buyouts to staff at its Pittsburgh headquarters. It also announced its intention to end the pension plan in the U.S. for salaried and non-union workers.

“They’ve restructured the business model,” Buffett said of the Heinz managers during Berkshire’s shareholder meeting in May. “The brands are as strong as ever, and the cost structure is going to be significantly improved.”

© Copyright 2014 Bloomberg News. All rights reserved.

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