Rising interest rates boost Warren Buffett’s Berkshire Hathaway results

Warren Buffett’s Berkshire Hathaway is fast becoming one of the main beneficiaries of a sharp rise in interest rates in the US, as its fortress-like balance sheet begins to generate hundreds of millions of dollars in income for the company. this great corporation.

The profit the company earned on $109 billion in cash nearly tripled from a year ago to $397 million in the third quarter, it revealed on Saturday, noting that the profit “mainly due to rising short-term interest rates.”

Berkshire keeps most of its cash in short-term Treasury bills, bank deposits and in money market accounts, where interest rates have risen rapidly as the Federal Reserve tightens monetary policy. Last week Central Bank of the United States of America raised interest rates to between 3.75 and 4%, up from near zero at the start of the year, and traders expect that rate to peak at 5% next year.

While tighter policy has sent shockwaves through financial markets – even denting the value of Berkshire’s massive stock portfolio – it is finally starting to pay dividends to investors. firms and consumers hold cash.

Data from the Investment Firms Institute shows that the amount of cash in money market funds that cater to retail investors on a daily basis has risen to a record high.

Line graph of cash, cash equivalents and short-term Treasury holdings ($ billion) showing Berkshire's 9 billion cash pile currently generating sizable interest income

Buffett and Berkshire Vice Chairman Charlie Munger over the past decade have presided over the dramatic expansion of Berkshire’s cash holdings, which they believe is crucial to the catastrophic solvency that businesses guarantee corporate risk may one day have to perform.

That’s a point underscored by third-quarter results that showed Berkshire was hit by a $3.4 billion pre-tax loss from Hurricane Ian, which killed more than 100 people as it tore through parts of Florida. US President Joe Biden said it will take years, not months, for the region to recover.

Berkshire’s insurance unit suffered a $962 million operating loss for the quarter, with Geico warning that higher used auto parts prices and an increase in crashes are affecting results of the company.

Column chart of Quarterly Interest and Other Earnings (millions of dollars) shows Higher Interest starting to benefit Berkshire Hathaway

Buffett and Munger have long been able to incur large losses in their insurance division because of the sizable “float” – the premiums they collect before finally paying the claims on the obligations. . That popularity has helped spur investments in stocks and finance the company’s business acquisitions.

The sell-off in financial markets has plagued Berkshire’s equity portfolio, which includes large stakes in Apple, American Express, Chevron and Bank of America. The company said its portfolio has fallen in value to $306.2 billion from $327.7 billion at the end of June.

Those declines pushed it to a net loss of $2.7 billion for the period, or $1,832 per Class A share, from a profit of $10.3 billion a year earlier, worth $6,882 a share. Buffett has long described the change in his portfolio – which the company must record in its profit and loss statement due to accounting rules – as “nonsense”.

The dozens of businesses it owns, widely watched for signs of the health of the American business and industrial complex, have shown the resilience of the US economy while also signaling the possibility of Fed-designed decline. Berkshire’s results also suggest that the effects of inflation and the wage war are better off when real living standards come under pressure from higher prices.

Revenue at the BNSF rail line grew 17% to $6.5 billion, but profits tumbled due to reduced freight volumes and higher pay for employees. Earlier this year, the railway became the focus of attention when more than 30,000 union workers at BNSF threat of attackagainst conditions and demanded increased payouts.

A deal expected in September offered concessions to employees, and BNSF said payroll costs rose 27% in the third quarter from a year earlier.

The energy businesses in Berkshire’s utilities division reported a 17% increase in revenue, driven by higher electricity costs.

But the company’s real estate division has seen sales drop by nearly a fifth and its operating profit plummet 72% year-over-year as the housing market cools. and it sells fewer homes.

Berkshire said higher-than-expected mortgage rates will also put pressure on some businesses in the housing sector. During the quarter, however, these businesses – including tile maker Acme and flooring group Shaw – were able to raise prices and record strong demand.

Overall, operating income rose to $7.8 billion from $6.5 billion a year earlier. The result was achieved through greater profits in the manufacturing and service businesses.

Line chart of Total Return (%) shows Berkshire outperforming both stocks and Treasuries in 2022

Berkshire, this year bought a 21% stake in the energy company Occidental . Common Sharesrevealed that in the fourth quarter it will start reporting earnings from the oil and gas giant as part of its results.

The company also said it spent more than $1 billion during the quarter buying back its own stock.

Berkshire’s Class A stock, which is down 4.1% this year, has far outstripped the broader market. The S&P 500 index fell 20.9% while an investor in US Treasuries lost 15.3%, according to Ice Data Services, according to Ice Data Services.

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