Warren Buffett’s annual letter to Berkshire Hathaway shareholders highlighted his optimism about the conglomerate’s profit, while defending some business moves, such as Berkshire’s controversial partnership with 3G.
-------
Warren Buffett’s annual letter toBerkshire Hathaway Inc. shareholders highlighted his optimism about the conglomerate’s performance and the future of the American economy. But the billionaire also used sections of the 31-page letter to again address criticism of some of Berkshire’s business moves.
Mr. Buffett took pains to elaborate on his company’s controversial partnership with 3G Capital Partners LP, the investment firm that co-owns Kraft Heinz Co. and Burger King’s parent companyRestaurant Brands International Inc. with Berkshire.
The two partners share the same goal of buying and holding large businesses but “follow different paths” in pursuit of that objective, Mr. Buffett wrote, justifying a relationship that some Berkshire shareholders have questioned. He has defended Berkshire’s links with 3G in the past, including at last year’s annual meeting in Omaha, Neb.
3G pushes for drastic change at the companies it buys, stripping costs, cutting jobs and installing new management. The partnership has riled some Berkshire shareholders who are used to Mr. Buffett’s style of letting subsidiaries operate with little interference and layoffs.
“Jorge Paulo and his associates could not be better partners,” Mr. Buffett wrote, referring to 3G’s co-founderJorge Paulo Lemann.
Berkshire, which also released earnings, reported net profit climbed to $24 billion for the year, including a one-time investment gain tied to the merger last year of Kraft Foods and H.J. Heinz. Berkshire owns 27% of the combined company, which has annual sales of $27 billion. Excluding the gain, Berkshire’s full-year profit was $17.4 billion on revenue of $211 billion.
The letter, a yearly tradition that investors and fans parse for tips and insights, covered familiar territory that Buffett fans have come to expect. Mr. Buffett reiterated that he is bullish on America, talked up the performance of various Berkshire businesses and individual managers, and aired old jokes.
Mr. Buffett praised BNSF Railway Co., which last year turned its performance around after a difficult 2014, at a time when other rail operators are struggling with weak earnings partly due to low oil prices.
Although revenue fell 5.5% for the year due to falling customer shipments, profits rose 10% to $4.3 billion as BNSF improved its operational performance. Still, for the fourth quarter, BNSF’s profit fell 9% to around $1.1 billion as carload volume fell. Mr. Buffett said in the letter he expects lower earnings at the railroad in 2016.
Berkshire’s insurance operations were less profitable in 2015 as Geico, the country’s second-largest auto insurer, paid out more in claims and reinsurance profits slid. Including underwriting profits and income from investments tied to insurance-related money, Berkshire earned $4.9 billion from the insurance business last year, down nearly 6% from the year before.
Book value, a measure of assets minus liabilities that Mr. Buffett has long used to measure performance, increased 6.4% per share during the year, outperforming the S&P 500 stock index. The billionaire investor used to set himself the goal of beating the S&P on a five-year rolling basis, although he has acknowledged it has gotten harder as Berkshire has gotten bigger. The S&P 500 was essentially flat last year when dividends are factored in.
In last year’s letter, Mr. Buffett said for the first time that Berkshire’s long-term stock price had become a better indicator of the company’s performance than book value.
The tie-up with 3G has become important in recent years because Berkshire’s massive size has required Mr. Buffett to veer from his traditional approach of not buying companies that are bloated, instead pursuing those run by cost-conscious managers such as Precision Castparts Corp., which Berkshire bought last month for $32 billion.
It has become harder for Berkshire to find large, already well-run companies that will add significantly to Berkshire’s growth and Mr. Buffett isn't the kind of manager who buys a company with the goal of fixing its costs. 3G provides the investor a way out.
The firm’s method is to buy companies that offer opportunities to slash costs and thus boost productivity, “the all-important factor in America’s economic growth over the past 240 years,” Mr. Buffett wrote. Like 3G, “we, too, crave efficiency and detest bureaucracy.” Mr. Buffett said he would do more deals with 3G as long as they’re on a friendly basis.
The billionaire also devoted a chunk of his letter to explaining the practices of Clayton Homes Inc., a mortgage lender and home builder that supplies 45% of manufactured homes to low-income buyers. The nation’s largest manufactured housing company came under scrutiny after a couple of media articles alleged predatory collection and lending practices, high fees and other problems.
Mr. Buffett defended Clayton Homes at last year’s annual meeting in Omaha. In the letter, he distinguished Clayton from the reckless methods of the home lending industry before the financial crisis, saying that Clayton keeps every mortgage it originates and assumes all of the risk instead of moving it to another party.
The investor noted that that various federal and state regulatory authorities have examined Clayton in the past two years, and the company has only paid $38,200 in fines and refunded $704,678 to customers.
What’s more, more than 95% of borrowers were current on their mortgage payments at the end of 2015.
In another fiery section of his letter, Mr. Buffett chided this year’s presidential candidates for being downbeat about America’s prospects.
“That view is dead wrong: The babies being born in America today are the luckiest crop in history,” he wrote. Although the current annual 2% GDP growth rate may not seem like much, Mr. Buffett wrote than over a generation, it would deliver “astounding” gains on a per capita basis, taking into account population growth.