Buffett Still Wants Deals but Can't Find Any Attractive Ones

Billionaire Warren Buffett says his company has benefited from some “extraordinary luck” in finding acquisitions like BNSF railroad over the decades, but he hasn’t had much of that in recent years as Berkshire Hathaway’s cash pile has grown to nearly $147 billion.

Buffett sought to reassure shareholders with his annual letter Saturday that he retains a strong appetite for acquisitions and stock investments, but he hasn't found many of either that interest him at today's inflated prices. In fact, Berkshire was a net seller of stocks again last year, unloading $7.4 billion more shares than it bought.

He blamed the continued low interest rates for helping drive up the price of stocks and whole companies alike, and in the past he has said that increasing competition from private equity buyers has also made it hard to find good deals.

“From time to time, such possibilities are both numerous and blatantly attractive. Today, though, we find little that excites us,” Buffett wrote about the prospects for finding good stock investments.

So Berkshire has focused on growing the 90-odd businesses the Omaha, Nebraska-based conglomerate already owns and repurchasing its own shares — something Buffett has invested $51.7 billion in over the last two years including $27 billion last year. But the pace of buybacks may have slowed a bit because Berkshire has only bought $1.2 billion of its own shares so far this year.

With Berkshire's companies generating about $7 billion in cash every quarter, the repurchases haven't been enough to meaningfully shrink the cash pile. And Buffett said he will always keep at least $30 billion on hand to make sure Berkshire can cover any catastrophic claims on the insurance policies its companies write.

Buffett's letter is always well read in the business world because of his remarkably successful track record, but he kept his message focused on Berkshire's businesses and didn't mention politics or say much about the broader economy.

He also didn't offer any new details about Berkshire's succession planning in his first letter since saying last spring that Berkshire Vice Chairman Greg Abel will one day replace him as CEO, although the 91-year-old Buffett has no plans to retire. Buffett only confirmed that plan after his business partner, Charlie Munger, slipped up and hinted at it during last year's annual meeting.

“I felt like there was an opportunity here for Buffett to do something more formal and make comments about Abel’s qualifications or why shareholders and investors should trust he was the right candidate. There could have been more commentary around that,” Edward Jones analyst Jim Shanahan said.

Investor Bill Smead said Buffett also didn’t devote much space in his letter to warning people about foolish behavior as he has often done in the past.

“It just seems like the last two or three years of letters and annual meetings, there has just been way more that he didn’t say than what he did,” Smead said.

But Buffett did warn investors to be careful when reading other companies' financial reports to make sure they are accounting for all their costs when they report their earnings.

"Deceptive ‘adjustments’ to earnings – to use a polite description – have become both more frequent and more fanciful as stocks have risen. Speaking less politely, I would say that bull markets breed bloviated bull ...," Buffett wrote.

Despite the dearth of acquisitions and new investments Berkshire has continued to profit as the economy rebounded from the depths of the pandemic. The company reported making $39.6 billion, or $26,690 per Class A share, during the fourth quarter. That's up from $35.8 billion, or $25,015 per Class A share, a year ago.

“In 2021, the majority of the operating companies benefited from the tailwind of an economic recovery,” CFRA Research analyst Cathy Seifert said.

But those bottom line figures were inflated by paper gains on Berkshire's investments, which is why Buffett maintains that operating earnings are a better measure of the company's performance because they exclude investments and derivatives. By that measure, Berkshire's operating earnings jumped from $5.02 billion, or $3,224.74 per Class A share, to $7.3 billion, or $4,904.23 per Class A share, during the fourth quarter.

The four analysts surveyed by FactSet expected Berkshire to report operating earnings per Class A share of $4,197.84 in the quarter.

Buffett said the four biggest pillars of Berkshire's business — its insurance companies, its $161 billion investment in Apple stock, BNSF railroad and its collection of utilities — all helped it succeed last year. The railroad alone contributed a record $6 billion in profit last year while the utilities set a record of their own with a $3.5 billion profit. And Buffett praised Apple's CEO Tim Cook as a brilliant executive.

Buffett said that this year Berkshire will bring back the full slate of events surrounding the company's annual meeting that used to routinely attract more than 40,000 people before the pandemic forced it to go virtual for the past two years. But anyone who wants to attend the April 30 meeting in Omaha to hear Buffett spend hours answering questions will have to prove they have been vaccinated for COVID-19.

Berkshire owns an eclectic variety of companies, including BNSF, a number of large electric utilities, Geico insurance and an assortment of manufacturing and retail companies. The conglomerate also holds large stock investments in Apple, Coca-Cola, Bank of America and other companies.