Warren Buffett’s Kraft Heinz Bet Dragged Down Berkshire Hathaway in 2018
Conglomerate swung to a $25.4 billion loss in the fourth quarter due to an unexpected write-down at Kraft Heinz and unrealized investment losses
The world’s most famous investor had one of his worst years ever in 2018.
Warren Buffett’s Berkshire Hathaway Inc. BRK.B -1.67% said Saturday it swung to a $25.4 billion loss in the fourth quarter due to an unexpected write-down at Kraft Heinz Co. KHC -27.46% and unrealized investment losses.
But Berkshire posted operating earnings of $5.7 billion, up from $3.3 billion a year earlier, due to increased earnings from Berkshire’s railroads, energy business and other segments. For the year, Berkshire posted $24.8 billion in operating earnings. That was a record high, Mr. Buffett said in his annual letter to shareholders, which was also released Saturday.
Mr. Buffett in his letter offered no hints about who will eventually succeed him as CEO. But he praised deputies Ajit Jain and Greg Abel, saying that decisions to elevate the two men last year into more prominent roles were overdue.
Messrs. Jain and Abel were promoted in early 2018 to vice chairmen and now oversee many of Berkshire’s day-to-day operations. One of the two men is expected to succeed Mr. Buffett as chief executive.
“Berkshire is now far better managed than when I alone was supervising operations,” Mr. Buffett wrote.
Mr. Buffett’s annual shareholder letters are widely read on and off Wall Street for his musings on markets, investing and the economy. This year’s letter was shorter than usual and stuck mostly to discussing Berkshire’s business.
As usual, Mr. Buffett struck an upbeat tone about the U.S. economy and said the country will thrive regardless of which political party is in charge. A longtime Democrat, Mr. Buffett said the success of the American economy over time benefits everyone.
“It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone,’” Mr. Buffett wrote. In addition, he said, “Americans will be both more prosperous and safer if all nations thrive.”
Berkshire reported net earnings of $4 billion in 2018, down from $44.94 billion in 2017. Berkshire’s 2017 earnings soared in the fourth quarter of 2017 due to changes in the U.S. tax law that lowered Berkshire’s deferred tax obligations for stock investments that it currently holds.
Berkshire’s earnings are unusually volatile because it holds large equity stakes in companies including Wells Fargo & Co. and Apple Inc. An accounting rule that went into effect last year requires Berkshire to include unrealized investment gains or losses in its net income.
Kraft Heinz contributed a $2.7 billion loss to Berkshire in 2018, compared with adding $2.9 billion to its earnings in 2017. Kraft Heinz on Thursday wrote down the value of some of its biggest brands, disclosed an investigation by federal securities regulators and slashed its dividend.
The company’s book value per share rose 0.4% in 2018, the company said, compared with a minus 4.4% total return in the S&P 500, including dividends.
Mr. Buffett has traditionally encouraged shareholders to pay attention to Berkshire’s book value over its market value, but he said in the letter that market value is now the more relevant metric.
Berkshire hasn’t notably outperformed the S&P 500 in recent years. Berkshire hasn’t done a major deal in three years, and Mr. Buffett has struggled to find reasonably priced large companies to buy. As Berkshire continues to grow and accumulate cash, Mr. Buffett is under pressure to make ever-larger deals to move the needle on its earnings. Berkshire’s largest acquisition in 2018 was the $2.5 billion purchase of a New York medical malpractice insurer.
Berkshire’s cash pile, which is mostly invested in Treasury bills, grew to almost $112 billion at year-end, marking the sixth straight quarter above $100 billion.
Mr. Buffett offered no specific guidance on how he may use his growing pile of cash, and he said Berkshire is likely to invest more in stocks than acquisitions in 2019. “Many stocks have offered far more for our money than we could obtain by purchasing businesses in their entirety,” he wrote. “We continue, nevertheless, to hope for an elephant-sized acquisition.”
Berkshire repurchased a bit over $400 million of its stock in the fourth quarter, down from $928 million in buybacks in the third quarter. Investors were hoping Berkshire would spend a significant chunk of its cash buying back shares.
Some of Berkshire’s 60-odd subsidiaries completed acquisitions, but those deals tend to be small. Berkshire spent $1 billion on bolt-on acquisitions in 2018, the company said, down from $2.7 billion the prior year.