Warren Buffett’s Berkshire Hathaway Inc. said it expects a $1.25 billion pretax gain in the second quarter and lower investment income in future periods after its $5 billion investment in Goldman Sachs Group Inc. was redeemed.
Berkshire was paid $5.5 billion for the securities on April 18, the Omaha, Nebraska-based company said late on May 6 in its first-quarter earnings report. The payment by Goldman Sachs includes the $5 billion Berkshire invested in 2008 and a 10 percent premium.
“We anticipate our investment income for the second quarter of 2011, and likely beyond, will decline compared with 2010, given the relatively low yields currently available from new investment opportunities,” Berkshire said. Goldman Sachs paid dividends of 10 percent before the redemption.
Buffett, 80, Berkshire’s chairman and chief executive officer, is accumulating cash and seeking acquisitions as almost record-low interest rates limit fixed-income returns. The firm’s cash rose to $41.2 billion on March 31, the highest quarter-ending total since 2007. That balance may gain with the Goldman Sachs redemption and the expected repayment by General Electric Co. of a $3 billion investment.
“That money is earning virtually nothing now,” Buffett, speaking at Berkshire’s April 30 annual meeting, said of the cash received from New York-based Goldman Sachs. “We have lost or are losing at least three very-high-yield investments that we cannot replace.”
$1 Billion Dividend
Berkshire collected about $3.9 billion from Swiss Reinsurance Co. on Jan. 10, according to the earnings report. The payment ended a 2009 investment that garnered Buffett’s firm dividends of 12 percent. Berkshire, which holds cash and securities to support liabilities at the company’s insurance subsidiaries, made the Goldman Sachs, GE and Swiss Re investments during the credit crisis when traditional sources of financing retreated.
Berkshire is taking a $1 billion dividend this month from its Burlington Northern Santa Fe subsidiary, the railroad unit said in a separate May 6 filing. Fort Worth, Texas-based Burlington Northern, which Berkshire bought in a $26.5 billion deal last year, paid $1 billion in dividends to its parent in the first quarter.
“The cash is just coming in like gangbusters, and that’s a high-class problem to have,” said Paul Howard, director of research at Solstice Investment Research in Glastonbury, Connecticut. Buffett “is setting expectations low on the upcoming quarter and coming quarters for the investment-income number.”
Net investment income at Berkshire’s insurance businesses fell 3.6 percent to $952 million in the first quarter, the company said. Berkshire announced detailed results for the period in the filing after issuing a preliminary report on April 30. Net income dropped to $1.51 billion from $3.63 billion a year earlier as the insurance segment posted an underwriting loss of $821 million.
“Over time, if we’re going to keep your money, we are going to need to get a better-than-average return,” Buffett, who doesn’t pay dividends to Berkshire shareholders, said at the company’s annual meeting. “So far we’ve done OK on that, but the job gets tougher every year.”
The yield on two-year U.S. Treasuries slid for seven consecutive trading days through May 6 to 0.549 percent. The yield hit a record low of 0.31 percent on Nov. 4. The two-year note’s average yield over the past 10 years was more than 2.5 percent.
Berkshire paid about $1.5 billion in cash in the first quarter to raise its stake in Marmon Holdings Inc. to 80 percent from about 64 percent. The company plans to spend about $9 billion in cash in the third quarter to acquire Lubrizol Corp., the Wickliffe, Ohio-based maker of engine additives.
Wells Fargo, Kraft
First quarter profit was reduced by $506 million on charges tied to declines in the value of stakes in San Francisco-based Wells Fargo & Co. and Kraft Foods Inc., based in Northfield, Illinois. The Securities and Exchange Commission questioned Berkshire in December about its equity holdings. The firm told the regulator in February that it didn’t write down those holdings last year because it expected both stocks to recover.
The charges were required by accounting rules and produced an “odd result” in erasing Berkshire’s unrealized losses on the Wells Fargo shares and leaving the company with an unrealized gain of $3.7 billion on the stake, the firm said. The unrealized gains are the difference between market price and the value ascribed by Berkshire.
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