Business conglomerate Berkshire Hathaway, owned by billionaire investor Warren Buffett, has almost doubled its quarter three profit margins, as it benefited from new tax cuts introduced by US President Donald Trump.
As well as its business benefits from a tax perspective, Berkshire Hathaway’s fortune in avoiding hurricane payouts in key areas from its insurance arm also allowed it to keep profits high.
Easily seeing off analyst expectations, it pulled in $6.88bn this quarter against the predicted $6.11bn. This marks a dramatic upturn from 2017, when its Q3 profits were at $3.44bn.
This positive news allowed the company to buy $900m of its own stock at a better price and will help it deliver better end-of-year results for shareholders.
Buffett admitted recently that he has struggled to find suitable places to invest all of the company’s accumulated wealth, and a bumper cash crop from the shares’ buyback will only increase this problem. However, after turning around such strong balance sheets for this quarter, the situation is unlikely to cause much worry.
The brighter picture for Berkshire Hathaway is also due in part to how little it had to pay out from its insurance entity, with fewer casualties and damaged properties than last year. One large factor in its lower Q3 performance in 2017 was the tragic Mexico earthquake, which caused significant damage across a vast area.
The stark difference in how much the company had to underwrite last year compared to 2018, going from $1.4bn to just $441m, clearly shows the big profit swing.
Berkshire Hathaway shareholder Bill Smead, CEO of Smead Capital Management, said: ‘This is absolutely one of the biggest quarterly earnings reports that has ever come out of a United States corporation,’ suggesting that some funds managers did not see this coming.
Although the company’s net income shot up an incredible 355% to $18.5bn, Buffett warned against paying too much attention to this, saying that it was the result of changes to accountancy rules and could well lead to ‘wild and capricious’ results that would be hard to measure. He instead recommended that investors follow operating profits, as they give a more reliable indication of company standings.
A drop in corporate tax that Trump signed off on last December also helped drop the company’s tax responsibility to 19.2% compared to the previous 25.3%.
There was also a strong $118bn performance for its insurance float, which is a measure of reaching premiums before claiming them. This has allowed Buffett to invest so much and grow the company to this level over the years.
Berkshire Hathaway previously had a moratorium on buying back shares but has since relaxed this policy to bring $928m back into company hands, massively increasing the liquidity potential of the organization.
This allowed it to finish the quarter with $103.6bn in cash, factoring in short-term treasury and other investments along these lines.
The buyback is Buffett’s biggest investment since January 2016, when he bought Precision Castparts, an aircraft parts maker, for $32.1bn.
Many other aspects of the conglomerate have been performing well, and shares are now up to $308,411.08 apiece for Class A, which is at 3.6% for this year and slightly eclipses S&P500’s return of 3.4%.