Berkshire Hathaway Posts $29 Billion Gain in 2017 From Tax Plan -- 2nd Update

By Nicole Friedman

Warren Buffett has one man to thank for Berkshire Hathaway Inc.'s $29 billion windfall in 2017: President Donald Trump.

The Omaha billionaire backed Mr. Trump's opponent Hillary Clinton during the 2016 presidential campaign. But new tax cuts the president signed into law last December provided Berkshire with the sizable one-time gain that helped inflate annual profits to nearly $45 billion.

Other American corporations like AT&T Inc. and Comcast Corp. also booked large paper gains as a result of the new tax legislation.

Mr. Buffett, Berkshire's chairman and a Democrat, expressed reservations last year about the need for corporate tax cuts. But he also said any drop in corporate taxes would benefit many of Berkshire's businesses and its shareholders.

"I got a million shareholders at Berkshire Hathaway. And they would all love to see a corporate tax cut," he said on CNBC in October. But, he added, "we have a lot of businesses, 60 or 70. I don't think any of them are noncompetitive in the world because of the corporate tax rate."

When asked on CNBC in January if he would have voted for the new tax law, Mr. Buffett demurred: "I would have had a different bill myself."

The tax changes lowered Berkshire's estimate of how much it would have to pay in taxes if it sold the stock investments it currently holds. Berkshire has around $100 billion in unrealized gains on equity investments, Mr. Buffett has said, and those gains are now expected to be taxed at a 21% rate, down from 35%.

The immediate net windfall for Berkshire was $29 billion, which helped push Berkshire's net earnings to $44.94 billion in 2017 from $24.07 billion the prior year while offsetting declines in certain businesses. Berkshire's operating earnings fell 18%, from $17.6 billion in 2016 to $14.5 billion in 2017, as hurricanes and other catastrophes caused losses in the company's insurance operations.

Berkshire's book value per share rose 23% in 2017, the company said, compared with a 22% total return in the S&P 500, including dividends. Its overall net worth increased by $65 billion, $29 billion from the tax benefits and $36 billion from operations.

Mr. Buffett said in a letter released to shareholders Saturday that the increase in the company's net worth was "real" but "a large portion of our gain did not come from anything we accomplished at Berkshire."

The annual letter from Mr. Buffett is widely read by investors and analysts. This year, the 16-page document was shorter than usual and left out some of Mr. Buffett's usual themes on the economy and the future prospects of the U.S.

"This is a company that would like to hold itself up as having a superior business model and a superior strategy, yet the bump from the results came from something that was not their doing," said Cathy Seifert, equity analyst at CFRA Research. "It was a very subdued letter."

The tax gain is the latest example of how Berkshire has benefited from Trump's election. The company's stock price climbed in the months following the election on the expectation that reduced taxes and regulations would boost Berkshire's businesses, which range from a railroad and utilities to industrial manufacturers and retailers.

Mr. Buffett also said last year that the company planned to sell some of its losing stock investments in 2017, when they would be more advantageous from a tax perspective. Berkshire sold shares of International Business Machines Corp. throughout 2017 and sharply lowered its IBM stake in the fourth quarter.

However, at Berkshire's annual meeting last May, Mr. Buffett said rising health-care costs were a bigger threat to the competitiveness of U.S. companies than taxes. Berkshire joined Amazon.com Inc. and JPMorgan Chase & Co. in January to form a new company to figure out how to reduce health-care costs for their employees. The company is in the early stages of planning, and Mr. Buffett didn't write about it in his letter.

He did address the conglomerate's growing cash pile and lamented the lack of well-priced acquisition opportunities. Berkshire's cash, which is mostly invested in Treasury bills, ballooned to a record $116 billion at year-end.

"We will need to make one or more huge acquisitions," Mr. Buffett wrote in his letter. Prices for businesses were too high for his taste in 2017, he said, but "our smiles will broaden when we have redeployed Berkshire's excess funds into more productive assets."

In October, Berkshire took a 38.6% stake in truck-stop company Pilot Travel Centers LLC, which will increase to an 80% stake in 2023. But two potential large deals fell through last year. Kraft Heinz Co. dropped a $143 billion offer, which would have been partly backed by Berkshire, for Unilever PLC. And Texas power-transmission company Oncor terminated a deal with Berkshire's utility arm in favor of a higher offer from Sempra Energy.

Some of Berkshire's 60-odd subsidiaries completed acquisitions, but those deals tend to be small. Berkshire spent $2.7 billion on bolt-on acquisitions in 2017, the company said, up from $1.4 billion the prior year.

Mr. Buffett also avoided giving any new hints about his succession planning after promoting two executives to vice chairmen last month.

He reiterated his advice that individuals should invest passively and avoid high money management fees while discussing the final tally from his bet that an S&P 500 index fund would outperform a basket of hedge funds over a decade.

Write to Nicole Friedman at nicole.friedman@wsj.com

(END) Dow Jones Newswires

February 24, 2018 13:57 ET (18:57 GMT)

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