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3 Themes Buffett May Highlight in His Next Yearly Letter

By Katherine Chiglinsky

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What You Need to Know

  • In annual remarks to shareholders, he shares wisdom on managing Berkshire Hathaway and on life and investing.

Warren Buffett’s textile business-turned-conglomerate spent last year quietly inching into the future.

Berkshire Hathaway Inc. dug deeper into technology stocks in 2021 with a bet on Activision Blizzard Inc., bulked up on buybacks and announced that Greg Abel was the top pick to succeed Buffett whenever the 91-year-old steps down as chief executive officer.

Now, Buffett has a chance in his annual letter on Saturday to explain how these incremental moves will keep the conglomerate pushing forward.

“Looking at valuations, it’s perfectly in sync with the long-term strategy of not overpaying for stuff,” said Meyer Shields, an analyst at Keefe Bruyette & Woods.

The Activision move by one of Buffett’s deputies shows “that they do have liberty to invest in the sea of equities that they understand and it doesn’t all have to necessarily get filtered through Warren Buffett, in which case I think it is predictive of, at least conceptually, the sort of thing we should expect going forward.”

Investors look to Buffett’s letter each year to learn about his strategy for steering the more-than $690 billion conglomerate, and to revel in the billionaire’s folksy wisdom on life and investing.

Buffett’s task has been complicated in recent years as high valuations stymie one of his favorite capital-deployment options — dealmaking — and as Berkshire throws off more cash than he can quickly deploy.

That’s led Berkshire to make some changes. Buffett and his longtime business partner, Vice Chairman Charlie Munger, came to technology stocks “like some newborn infant that’s dragged there,” Munger recently told Yahoo Finance.

But now, Apple Inc. ranks as Berkshire’s biggest equities bet, with a stake worth $157.5 billion at the end of 2021, roughly 3.5 times the size of its second-biggest investment in Bank of America Corp.

Buffett’s investing deputies, Todd Combs and Ted Weschler, have also expanded Berkshire’s horizons. The Activision Blizzard investment was made just a few months before Microsoft Corp. agreed to buy the game maker.

There’s been a “tremendous shift that has occurred toward technology and communication-services stocks,” Jim Shanahan, an analyst at Edward Jones, said in a phone interview. “That never would have happened without those two lieutenants.”

Buffett loosened Berkshire’s buyback policy to help him deploy the firm’s cash pile of nearly $150 billion. The Omaha, Nebraska-based firm repurchased $20.2 billion of stock during the first nine months of 2021.

See: 4 Stocks Warren Buffett Didn’t Sell in Q4: Morningstar

The pace may have flagged in the fourth quarter when the Class A shares climbed nearly 10%. Along with the letter, Berkshire plans to announce earnings on Saturday morning, which should include details on buybacks.

The letter also holds the potential to offer insight into Berkshire strategies after the eventual departures of Buffett and Munger, who is 98. Buffett divulged one big detail last year when he confirmed that Abel, a key deputy who oversees all non-insurance businesses, would be the top candidate to someday replace him.

Any handover is most likely to occur when Buffett or Munger are no longer able to run the business, Shields said. Berkshire plans to hold its annual meeting in person this year for the first time since the pandemic began, offering investors a glimpse at how the pair is doing.

“I haven’t seen anything to suggest that their capabilities have deteriorated over the last 12 months and, barring some sort of news that they haven’t disclosed, I wouldn’t expect that to change,” Shields said. “I think we’ll see the sort of steady expansion of Greg’s responsibilities.”

What Bloomberg Intelligence Says

“Berkshire Hathaway’s strong consumer and earnings diversity may offset supply-chain issues, with our scenario analysis suggesting total operating company earnings of $5.5 billion. Share buybacks may match the 1Q-3Q pace of $6-$7 billion.” — Matthew Palazola, senior industry analyst, and Kylie Towbin, associate analyst

Here are other topics that could be covered in the annual letter:

1. Inflation Pressures

The U.S. is confronting some of the highest inflation in decades, which is sure to affect Berkshire’s broad mix of businesses. Buffett raised the issue at least year’s annual meeting, when he cited a “buying frenzy” by consumers.

“The one potential soapbox issue that he could talk about is the nature of inflation and how much of it is justified and how much of it is price-gouging,” Cathy Seifert, an analyst at CFRA Research, said in a phone interview. “That is a position that I think people would also like to hear him talk about.”

Inflation and supply-chain pressures were already starting to show up in Berkshire’s businesses through the end of the third quarter. Its building-products makers, which include Shaw flooring and Benjamin Moore paints, reported that supply-chain disruptions contributed to “significant cost increases” for important materials, leading to higher prices.

2. Berkshire and the Energy Sector

The conglomerate has a strong foothold in the energy sector, through its utility businesses in states such as Utah, Nevada and Iowa, natural-gas pipelines, and even operations in the U.K. Climate-change concerns have prompted a push toward renewable sources of energy.

Buffett touched on the topic in last year’s letter, saying that Berkshire Hathaway Energy has committed to reworking and expanding part of the grid out West as a “societal necessity.”

Berkshire has proposed a wind and solar project that could be among the renewable industry’s biggest if approved. The $3.9 billion effort would bring 2,042 megawatts of wind generation and 50 megawatts of solar power to Iowa.

3. Management Moves

Buffett’s company has been moving managers around. Earlier this month, it named energy executive Alicia Knapp to Kraft Heinz Co.’s board alongside Abel. Kraft Heinz has historically been a big deal for Berkshire, which helped create the packaged-food giant and continues to hold an investment in the firm. So any details about Knapp and her role at Berkshire could prove interesting.

Last year, Berkshire elected two new board members, Buffett’s daughter Susan Buffett and fund manager Christopher Davis. Then this month, Tom Murphy, a director for nearly two decades and a longtime friend of Buffett, said he would resign after battling Covid-19. It’s unclear whether Berkshire plans to fill his board seat.

Berkshire also has one particularly interesting longer-term management mystery. Berkshire elevated Combs, a top investing deputy who manages billions of dollars, to CEO of auto insurer Geico at the start of 2020. Months later, Buffett said he hoped that Combs wasn’t going to be there very long, but Geico still hasn’t named a new CEO.

Changes at Geico have been announced in Buffett’s letter before, including the news that longtime CEO Tony Nicely had quietly stepped down in 2018.

Leadership at Geico is “critical” because of the intensity of the auto-insurance industry, according to KBW’s Shields. State Farm Mutual Automobile Insurance Co. ranked as the biggest seller of U.S. personal auto policies in 2020, with Geico right behind and Progressive Corp. at No. 3, according to data from the National Association of Insurance Commissioners.

“The competition is so fierce,” Shields said. “It’s such a high-profile role.”

(Photographer: Andrew Harrer/Bloomberg)

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