(Berkshire Hathaway annual letter story, updated for Monday trading)
NEW YORK (
, CEO of
, is hungry for more acquisitions in the $5 billion to $20 billion range, according to the latest Berkshire Hathaway annual letter, free market capitalism's epistolary equivalent to Saint Paul's letter to the Corinthians.
Buffett's aggressive stance on more mega-acquisitions -- some were predicting that last year's purchase of Burlington Northern would be his last -- his bullish commentary about the U.S. economy, and fourth quarter profits that surged by 43% year over year, sent Berkshire Hathaway shares to a new 52-week high on Monday morning, recently trading at $86.85. The Burlington Northern acquisition had a huge impact on earnings at Berkshire Hathaway at the end of 2010, and Buffett estimates that the railroad will generate more than 30% of after-tax earnings for Berkshire Hathaway. The fourth quarter profit at Berkshire Hathaway rose 43% year over year.
On the subject of maintaining earnings power at Berkshire Hathaway, Buffett wrote in this year's annual letter, "Charlie
Munger and I hope that the per-share earnings of our non-insurance businesses continue to increase at a decent rate. But the job gets tougher as the numbers get larger. We will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy."
There had been speculation leading up to the annual report that Berkshire would soon implement a dividend as a way to manage some of its large cash hoard. If so, Buffett gave no hint that he's prepared to take that step, and he devoted a lengthy portion of the annual letter, which was released Saturday, to the acquisition discussion.
Buffett wrote, "not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years. Instead, we have retained all of our earnings to strengthen our business, a reinforcement now running about $1 billion per month...No other American corporation has come close to building up its financial strength in this unrelenting way." Buffett added, "Having loads of liquidity, though, lets us sleep well."
Buffett even included a handy checklist for companies interested in being acquired by Berkshire Hathaway, listing these factors in the annual letter:
"Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units)
"Demonstrated consistent earning power (future projections are of no interest to us, nor are 'turnaround' situations)
"Businesses earning good returns on equity while employing little or no debt
"Management in place (we can't supply it)
"Simple businesses (if there's lots of technology, we won't understand it)
"An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
"The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-$20 billion range."
The discussion of acquisitions from Buffett was not light on his usual folksy American wit, either. Hoping to stave off would-be solicitations, Buffett writes, "Charlie
Munger and I frequently get approached about acquisitions that don't come close to meeting our tests: We've found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: 'When the phone don't ring, you'll know it's me.'"
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Speaking to Berkshire Hathaway's advantage over other companies in terms of being able to reinvest capital across many industries, Buffett writes, "Most companies limit themselves to reinvesting funds within the industry in which they have been operating. That often restricts them, however, to a 'universe' for capital allocation that is both tiny and quite inferior to what is available in the wider world. Competition for the few opportunities that are available tends to become fierce. The seller has the upper hand, as a girl might if she were the only female at a party attended by many boys. That lopsided situation would be great for the girl, but terrible for the boys."
Nonetheless, the issue of managing Berkshire Hathaway's large cash position, or as Buffett calls it in the annual letter, the "what-will-they-do-with-the-money" factor, was given lengthy discussion in terms of the sheer amount of capital and the issue of how Berkshire Hathaway grows earnings given its size and the dissipation of its advantage over the
. It also comes at a time when very profitable financial crash investments in
and Swiss Re are winding down, as Buffett notes in the letter.
At year-end 2010 Berkshire held $38 billion of cash equivalents that have been earning "a pittance throughout 2010," due to low interest rates. Buffett predicts that eventually better yields will add at least $500 million and likely more to investment income, but that day is "unlikely to come soon."
"Even before higher rates come about, furthermore, we could get lucky and find anopportunity to use some of our cash hoard at decent returns. That day can't come too soon for me: To update Aesop, a girl in a convertible is worth five in the phone book."
Buffett was not silent on the issue of dividends, at least not when it relates to the public company stocks in which Berkshire is a major shareholder. In fact, Buffett is bullish on the dividends that are going to be paid by stocks in the Berkshire Hathaway portfolio.
Buffett estimates that once the
restrictions on bank dividend rates cease, annual dividends from
alone will increase by several hundreds of millions of dollars annually.
is another top 10 Berkshire Hathaway stock for which Buffett sees dividends continuing to rise.
Buffett writes in the annual letter, "Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn't be surprised to see our share of Coke's annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business."
Buffett noted that Berkshire Hathaway will raise its stake in operating subsidiary Marmon to 80% this year, buying an additional 17% from the Pritzker family for $1.5 billion, though this is part of an existing plan between Berkshire and the Pritzker family to sell the rest of Marmon to Buffett by 2013 or 2014.
-- Written by Eric Rosenbaum from New York.
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