Warren Buffett said executives who held back investments because of doubts about the economy are missing an opportunity as he plans to accelerate capital spending at his Berkshire Hathaway Inc. (A:US) this year.
“There was a lot of hand-wringing last year among CEOs who cried ‘uncertainty’ when faced with capital allocation decisions despite many of their businesses having enjoyed record levels of both earnings and cash,” Buffett wrote in an annual letter to Berkshire shareholders yesterday. “We will keep our foot to the floor and will almost certainly set still another record for capital expenditures in 2013. Opportunities abound in America.”
Berkshire spent $9.8 billion last year on plant and equipment as it bolstered railroad and utility units, Buffett said in the letter. That’s 19 percent more than the prior year, he wrote. Most of the spending was in the U.S.
Buffett often touts the prospects of the world’s largest economy, where Berkshire’s biggest units are based and where he amassed a fortune of more than $50 billion. U.S. lawmakers have been divided over how to shrink the budget deficit, frustrating corporate executives. Buffett said managers may be wrong to withhold investments, since the future in the U.S. has been unknown since the country’s declaration of independence in 1776.
“If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire,” he wrote. “Let us unburden you (A:US).”
Buffett, 82, led the letter by telling shareholders his performance was “subpar” in 2012. The growth in Omaha, Nebraska-based Berkshire’s per-share book value, a measure of assets minus liabilities, trailed the Standard & Poor’s 500 Index including dividends by 1.6 percentage points last year. The billionaire has failed to measure up to that yardstick only nine times since he took control of the company in 1965.
Class B shares (B:US) fell 1.2 percent to $100.80 at 7:42 p.m. in New York. The shares had rallied 30 percent in the last year through yesterday’s close, compared with the S&P 500’s 10 percent gain.
He also said he was disappointed for failing to make a major acquisition even though he had pursued a few large potential takeovers last year. Last month, he ended his drought by joining Jorge Paulo Lemann’s 3G Capital in announcing a $23 billion deal to take ketchup maker HJ Heinz Co. (HNZ:US) private.
“Our total investment of about $12 billion soaks up much of what Berkshire earned last year,” wrote Buffett, who is chairman and chief executive officer. “But we still have plenty of cash and are generating more at a good clip.”
Net income (A:US) rose 49 percent to $4.55 billion in the three months ended Dec. 31 on derivative gains. Buffett uses the contracts to speculate on the long-term gains of stock-market indexes and the creditworthiness of corporate borrowers.
He has encouraged investors to look beyond the quarterly fluctuation in derivative liabilities, in part, because the bets tied to equities don’t settle until 2018 and later. Full-year net income climbed 45 percent to $14.8 billion.
Profit was also helped by Buffett’s biggest acquisition, railroad Burlington Northern Santa Fe. The unit’s earnings rose to $932 million in the fourth quarter from $909 million a year earlier. Shipments of construction products, cars and petroleum increased in 2012 as coal declined.
Buffett has fueled Berkshire’s growth over the last four decades by financing takeovers (A:US) and investments with float, the premiums held at insurance units before claims are paid. That money was again cost-free, he wrote, because units including auto insurer Geico and reinsurer General Re turned underwriting profits in 2012.
Other insurers can’t claim the same track record, he said. In addition to having worse underwriting results, the industry faces “dim prospects” because near-record-low interest rates mean that they face declining income from fixed-income investments.
“Today’s bond portfolios are, in effect, wasting assets,” Buffett wrote. “Earnings at insurers will be hurt in a significant way as bonds mature and are rolled over.”
Buffett’s track record of profitable stock picks and takeovers paired with his homespun wisdom about corporate governance and investing have made his letters a must-read on Wall Street. Over the years, topics have ranged from executive pay and security valuation to derivatives and junk bonds.
This year’s letter included a section on dividends to address shareholder questions about why Berkshire doesn’t pay one. The billionaire reiterated a policy he described in the 1985 letter, saying that shareholders have benefited because he retained the money in the business and have faced lower taxes as a result. Under some scenarios, he wrote, shareholders would be better off selling some of their stock to meet their needs rather than get a dividend.
The letter is a prelude to Berkshire’s annual meeting in Omaha on May 4. The event typically draws tens of thousands of shareholders and is an opportunity for Berkshire subsidiaries from chocolate-maker See’s Candies to running-shoe company Brooks Sports to showcase and sell their wares.
Buffett said he and Berkshire Vice Chairman Charles Munger, 89, will take questions at the meeting from shareholders, a panel of journalists, Nomura Holdings Inc. insurance analyst Cliff Gallant and Jonathan Brandt, an analyst at Ruane, Cunniff & Goldfarb. To “spice things up,” he invited applications from people who are bearish on Berkshire, or betting the company’s shares will decline, to be considered for a seat on the panel of questioners.
Much of the letter was devoted to praising Berkshire managers, such as reinsurance head Ajit Jain and Ron Peltier, the CEO of Berkshire’s real-estate brokerage business HomeServices of America. Buffett relies on managers of the company’s more than 80 operating units to oversee their businesses’s day-to-day operations to leave him time to invest.
He’s been aided in that effort recently by Todd Combs and Ted Weschler, former hedge fund managers who were hired by Berkshire in the last three years to help oversee the company’s $87.7 billion stock portfolio (A:US).
“We hit the jackpot with these two,” Buffett wrote. “In 2012, each outperformed the S&P 500 by double-digit margins. They left me in the dust as well,” he wrote, putting the last sentence in smaller print than the rest of the letter.
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