Published: Sun, February 25, 2018
Markets | By Terence Owen

Buffett's Berkshire Hathaway received $29B windfall from Trump's tax overhaul

Buffett's Berkshire Hathaway received $29B windfall from Trump's tax overhaul

Unlike many tech conglomerates, which had parked their cash overseas, Berkshire Hathaway's cash was in America. Both were elected to Berkshire Hathaway's board earlier this year.

On acquisitions, too-high prices were a barrier to almost all deals Berkshire looked at a year ago, says Buffett.

Buffett declared in his 2015 annual shareholder letter that he has found the "right person", but he didn't offer any further details.

Both are considered candidates to eventually replace Buffett, 87, as Berkshire's chief executive.

Buffett's letter is always well-read in the business world because of his remarkable track record over more than five decades and his talent for explaining complicated subjects in plain language. But the biggest contributor to the $29 billion windfall, by far, was Berkshire's huge unrealized gains on stocks (a net figure of more than $100 billion at yearend) and a tax item that goes with them.

The fees - typically 2% of the investment's value and 20% of the profits - eat into clients returns, Buffett argued, and said returns do not typically justify those fees compared to the returns an investor could get from a low-priced S&P 500 index fund. Will Buffett, who loathes using free cash to pay cash dividends, opt to give some of the money back to shareholders?

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"Capital deployment is crucial to Berkshire's future earnings growth", Kai Pan, a Morgan Stanley analyst, told clients in a research note released Friday.

Berkshire Hathaway reported a $65.3 billion increase in book value over 2017, boosted by a $29 billion gain from changes to the US tax regime.

Berkshire has $116 billion in cash and government bonds that Buffett wants to deploy to increase the earnings of its non-insurance businesses.

For all of 2017, Berkshire's net income rose 87 percent to $44.94 billion. Berkshire's effective tax rate for 2018 could drop to roughly 20%, down from an estimated 30%, according to Morgan Stanley.

Most of Berkshire's 90-odd businesses reported improving profits in the quarter, but the company's key insurance units, which include Geico and several major reinsurance companies, reported a $491 million loss on policy underwriting.

"Investors should probably look for indications of the direction and scale of the initiative in Buffett's letter", CFRA's Seifert told clients. Berkshire bought 31.2 million more shares of Apple in the final three months of 2017, upping its stake by 23% and boosting its holdings to 165.3 million shares.

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