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Key takeaways
- Berkshire changed strategy by investing 20 billion dollars in shares.
- Operating profit rose by 16 per cent to 12.98 billion dollars.
- Alphabet is now among the company’s five largest holdings.
Berkshire Hathaway saw its operating profit in the second quarter rise by 16 per cent to 12.98 billion dollars, compared with the 11.16 billion dollars recorded in the same period last year.
Success story
This growth was driven mainly by strong performances in the manufacturing, retail and services divisions – which saw a 24 per cent increase to 4.47 billion dollars – as well as substantial gains in the energy division, where profit rose by 27 per cent to 891 million dollars. In addition, US railway company BNSF saw its profit climb by 6 per cent to a total of 1.56 billion dollars. These successes were able to offset a downturn in the insurance division, where both investment income and underwriting profits fell.
Strategic shift in capital allocation
Under the leadership of CEO Greg Abel, a significant strategic shift has taken place; he is now making use of the enormous capital reserves built up by Warren Buffett. Breaking with an almost three‑year trend of selling assets, Berkshire once again became a net buyer of shares and invested nearly 20 billion dollars in equities in the second quarter. The company has also significantly stepped up its share buyback programme, spending about 4.5 billion dollars to repurchase its own shares, a huge increase compared with the 235 million dollars spent in the first quarter.
Managing cash reserves vs shareholders’ expectations
As a result of these investments and the completed acquisition of Taylor Morrison, the company’s cash reserves fell from a peak of 397.4 billion dollars to 365.5 billion dollars at the end of June. This large deployment of capital meets longstanding demands from shareholders that the company should seek opportunities beyond government bonds, especially as Warren Buffett had previously struggled to find undervalued shares in the current market.
Portfolio
As for the portfolio, Alphabet is now, alongside American Express, Coca-Cola, Bank of America and Apple, one of the company’s five largest positions. This includes a 10 billion dollar commitment to Google’s parent company, aimed at supporting artificial intelligence initiatives, a move that Buffett confirmed was taken after consultation with Abel. Although Berkshire’s share price rose by 9 per cent over the past quarter, its annual return of 3 per cent is lagging behind the 13 per cent rise of the S&P 500, reports CNBC. Berkshire Hathaway’s share closed on Friday with a slight decline of -0.75 per cent.
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