Warren Buffett’s Berkshire Hathaway is quickly becoming one of the main beneficiaries of the sharp rise in US interest rates as its fortress-like balance sheet begins to generate hundreds of millions of dollars in revenue for the sprawling conglomerate.
Interest the company earns on its $109 billion cash stack nearly tripled year-over-year to $397 million in the third quarter, it announced Saturday, noting that earnings were “primarily due to the increase in short-term interest rates”.
Berkshire keeps the majority of its cash in short-term Treasury bills, bank deposits, and money market accounts, where interest rates have risen rapidly as the Federal Reserve tightened monetary policy. Last week the Federal Reserve hiked interest rates to 3.75-4 percent from near zero at the start of the year, and traders expect rates to be above 5 percent next year.
While tighter policies have sent shockwaves through financial markets — and even knocked down the value of Berkshire’s mammoth stock portfolio — it’s finally starting to pay dividends for companies and consumers who hold cash.
Data from the Investment Company Institute showed that cash parked in money market mutual funds, aimed at everyday retail investors, has swelled to an all-time high.
Buffett and Berkshire Vice Chairman Charlie Munger have overseen a significant expansion of Berkshire’s cash holdings over the past decade, which they believe is critical given the potentially catastrophic payouts the company’s insurance business will one day have to make .
It was a point underscored by third-quarter results, which showed Berkshire was hit by a $3.4 billion pretax loss from Hurricane Ian, which killed more than 100 people as it swept 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 in the quarter, with Geico warning that higher prices for used auto parts and an increase in accidents weighed on results.
Buffett and Munger have long been able to absorb large losses in their insurance line of business because of the sizeable “float” — insurance premiums they collect before they ultimately have to pay debt claims. This float has helped boost its investments in stocks and funded the company’s acquisitions.
The sell-off in financial markets hurt Berkshire’s stock portfolio, which includes large holdings in Apple, American Express, Chevron and Bank of America. The company announced that its $327.7 billion portfolio fell to $306.2 billion at the end of June.
These declines resulted in a net loss of $2.7 billion, or $1,832 per Class A share, for the period, compared to a profit of $10.3 billion a year ago, which translates to $6,882 per share. Buffett has long called the fluctuations in his investment portfolio — which accounting regulations require it to report on its income statement — as “meaningless.”
Widely watched for signs of the health of America’s industrial and business complex, the dozens of companies it owns exposed the resilience of the US economy while signaling the potential slowdown orchestrated by the Fed. Berkshire’s results also showed the impact of inflation and struggles for better wages as real living standards come under pressure from higher prices.
BNSF railroad revenue rose 17 percent to $6.5 billion, but profits fell as the volume of freight carried fell and higher wages were paid to employees. The railroad became a flashpoint earlier this year when more than 30,000 unionized workers at BNSF threatened to strike, fighting back on terms and demanding a pay rise.
A tentative agreement in September resulted in concessions to staff, and BNSF said payroll costs rose 27 percent year-on-year in the third quarter.
The energy businesses within Berkshire’s utility division reported a 17 percent jump in sales, boosted by higher electricity costs.
But the company’s real estate brokerage unit saw sales fall by nearly a fifth, and the unit’s operating profits plummeted 72 percent year-on-year as the housing market slowed and fewer homes were sold.
Berkshire said higher mortgage rates should also put pressure on its handful of housing-sector companies. During the quarter, however, these companies — including brickmaker Acme and flooring group Shaw — managed to raise prices and saw strong demand.
Overall, operating profits increased to $7.8 billion from $6.5 billion last year. The results were supported by larger gains in the manufacturing and services businesses.
Berkshire, which earlier this year bought a 21% stake in energy company Occidental’s common stock, said it would begin reporting profits from the oil and gas giant as part of its results in the fourth quarter.
The company also said it spent just over $1 billion buying back its own stock during the quarter.
Berkshire’s Class A shares, down 4.1 percent this year, have far outperformed the broader market. The benchmark S&P 500 is down 20.9 percent, according to Ice Data Services, while one investor in US Treasuries is down 15.3 percent.