Warren Buffett’s Berkshire Hathaway recently released its third-quarter earnings, offering valuable insights into the legendary investor’s strategies and recent actions. Here are three key takeaways from Berkshire’s latest financial report:
- Embracing Bonds for Higher Returns: While much attention has been given to Berkshire’s record $157 billion cash reserve as of the end of September, a closer examination reveals that Buffett and his team are leveraging higher interest rates. They have shifted a substantial portion of their cash into short-term government bonds, specifically Treasury bills. In June, Berkshire held around $50 billion in cash and $97 billion in Treasury bills. Over the subsequent three months, the cash reserve decreased by 38% to approximately $26 billion, while the pile of Treasury bills grew by 30% to $126 billion in that period.
This strategic move into bonds reflects Berkshire’s effort to capitalize on improved risk-free returns offered by higher interest rates, thanks to the Federal Reserve’s rate hikes in response to historic inflation levels. The increased investment income from bonds has significantly contributed to Berkshire’s earnings, with more than $11 billion collected in interest, dividends, and other investment income in the year up to September, nearly double the 2021 figure.
- Selling a Portion of Chevron: Berkshire Hathaway appears to have reduced its holdings in Chevron, selling approximately $2 billion worth of the oil and gas giant’s stock in the last quarter, representing about 10% of its Chevron position. At the end of September, Berkshire’s stake in Chevron was valued at $18.6 billion. If the company still held the 123 million shares it owned at the end of June, the position would have been worth approximately $21 billion based on Chevron’s closing stock price in September.
Berkshire’s overall stock portfolio saw some notable changes. The cost base of its banks, insurance, and finance stocks increased by 5% to $24.8 billion, while the cost base of its consumer products stocks decreased by around 3% to $35.5 billion. Additionally, the “commercial, industrial, and other” segment experienced an 8% decline, with a cost base of $51.1 billion. Berkshire previously disclosed selling around $500 million worth of HP stock in September, which contributed to the decline in the consumer products category. Speculation surrounds the commercial segment, with suggestions that Berkshire may have sold its $800 million stake in General Motors, pending confirmation or refutation in the forthcoming quarterly stock-portfolio update in mid-November.
- Accelerated Stock Buybacks: Warren Buffett and his business partner, Charlie Munger, seem to have increased their pace of stock buybacks since the end of September. Berkshire repurchased only $1.1 billion of its stock in the last quarter, a decrease from the $4.4 billion repurchased in the first quarter. This reduction is likely due to Berkshire’s stock rallying 13% in the six months leading up to September.
However, it appears that Buffett and Munger resumed buybacks, purchasing an estimated $800 million of stock between the end of the last quarter and October 24. This conclusion is drawn from the decline in the company’s outstanding shares during that period and its average stock price. Their decision to ramp up buybacks may have been prompted by a decline in Berkshire’s stock price between mid-September and late October, with the bulk of the last quarter’s repurchases occurring in September, as revealed in Berkshire’s earnings report.
Buffett’s annual shareholder meeting earlier this year highlighted the valuable insights hidden within Berkshire Hathaway’s earnings reports. Whether it’s information about the allocation of cash, hints about adjustments to the stock portfolio, or early indications of buyback activity in the current quarter, there is a wealth of information for astute investors to uncover.
