Berkshire's 2012 Book Value Gain Falls Short of S&P 500; Buffett Still Not Open to a Dividend

By Morning Star

Wide-moat rated Berkshire Hathaway's BRK.ABRK.B fourth-quarter earnings wrapped up a year in which acquisitions and ongoing improvements in the firm's non-insurance businesses contributed to what was a year of improving results for its insurance operations. Aftertax operating earnings increased 6% year over year during the fourth quarter, contributing to a 17% increase in earnings during 2012. Including the impact from investment and derivative gains, the firm reported a 49% increase in fourth-quarter net earnings, contributing to a 45% increase in net earnings for the full year.

Berkshire's book value per Class A equivalent share at the end of 2012 was USD 114,214--up 14% year over year. While a result like that would normally be seen as a positive, it was only the ninth time in the last 48 years Berkshire's percentage increase in its book value was less than that for the S&P 500 Total Return Index. Warren Buffett did go on to note in his annual letter to shareholders that in eight of those nine years the index posted gains of more than 15%.

Berkshire closed out the fourth quarter with close to USD 47 billion in cash on its books, down from USD 48 billion at the end of the third quarter. That said, the company did spend more than USD 1 billion on share repurchases, a nearly equal amount on business acquisitions, and close to USD 3 billion on capital expenditures during the fourth quarter, so we're not going to fret too much about the decline. If anything, we've become concerned about the growing cash hoard the last couple of years.

As such, we were encouraged to see Buffett putting more money to work this year, with the Heinz HNZ deal knocking more than USD 12 billion off the total. This leaves Berkshire with about USD 15 billion in need of investment, with USD 20 billion left over as a cash backstop for the insurance operations. Forget any talk of a dividend, though, as Buffett made it clear in his letter that the priorities for cash will remain (in this order): capital expenditures, acquisitions, and share repurchases. The payment of a dividend will only be considered once it no longer makes sense for Berkshire to be putting money back into the business and the market-price premium for Berkshire's stock is too high to warrant share repurchases.