UPDATE 1-Rising stocks fuel record profit for Buffett’s Berkshire; operating profit falls

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(Adds details from earnings, Buffett annual letter, shareholder comment, byline)

By Jonathan Stempel

Feb 22 (Reuters) – Warren Buffett’s Berkshire Hathaway Inc on Saturday posted a 23% decrease in quarterly operating profit, while soaring prices in stock holdings such as Apple Inc enabled the conglomerate to smash its old record for full-year earnings.

In his annual letter to Berkshire shareholders, Buffett defended Berkshire’s foray into stocks, which comes amid a four-year drought since its last major acquisition that has left Berkshire sitting on $128 billion of cash.

Berkshire did step up repurchases of its own stock, buying back roughly $2.2 billion after repurchasing $2.8 billion in the prior nine months.

“I am delighted with the increased commitment to share repurchases,” said Thomas Russo, a partner at Gardner, Russo & Gardner, which invests 13% of the $13 billion of assets it oversees in Berkshire. “It may be a very large arrow in Berkshire’s quiver to increase intrinsic value on a per-share basis.

Fourth-quarter operating profit fell to $4.42 billion, or approximately $2,720 per Class A share, from $5.72 billion, or about $3,484 per share, a year earlier, hurt by underwriting losses in its reinsurance operations.

Berkshire also posted quarterly net income of $29.16 billion, compared with a net loss of $25.39 billion a year earlier, reflecting gains in its common stock holdings.

For all of 2019, net income totaled $81.42 billion, topping the record $44.94 billion for 2017, when Berkshire benefited from that year’s reduction in the U.S. corporate tax rate.

Such huge swings stem from an accounting rule requiring Berkshire to report paper gains and losses from its stock holdings with net income even if it sells nothing.

Buffett wrote that the companies whose stocks Berkshire owns are generating returns that are “remarkable under any circumstances,” and “truly mind-blowing” compared to low single-digit returns available on bonds.

“Over time, Charlie and I expect our equity holdings—as a group—to deliver major gains, albeit in an unpredictable and highly irregular manner,” Buffett wrote, referring to Berkshire Vice Chairman Charlie Munger.

Apple soared 86% in 2019 and 31% in the fourth quarter alone, leaving Berkshire with a $73.67 billion year-end stake.

Despite the record results, Berkshire’s stock was a laggard in 2019, rising 11% compared with a 31.5% gain in the Standard & Poor’s 500 including dividends, in part reflecting the drag from the cash stake.

Among other Berkshire units, quarterly profit increased 4% at the BNSF railroad, while Geico posted a small underwriting loss.

Insurance float, which is premiums collected before claims are paid and helps fund Berkshire’s growth, grew 5% last year to $129.4 billion, Berkshire said.

Reporting by Jonathan Stempel in New York; Editing by Giles
Elgood, Megan Davies and Franklin Paul

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