Interest rate hikes boost Warren Buffett's earnings at Berkshire Hathaway

Interest rate hikes boost Warren Buffett’s earnings at Berkshire Hathaway

Warren Buffett’s Berkshire Hathaway is fast becoming one of the main beneficiaries of the sharp rise in U.S. interest rates, as its fortress-like balance sheet begins generating hundreds of millions of dollars in income for the sprawling conglomerate.

The interest the company earns on its $109 billion cash pile nearly tripled from a year earlier to $397 million in the third quarter, it disclosed on Saturday, noting that the gain was “primarily due to increases in short-term interest rates.”

Berkshire has the vast majority of its cash in short-term Treasury bills, deposits at banks and in money market accounts, where interest rates have risen rapidly as the Federal Reserve has tightened monetary policy. Last week, the US Federal Reserve raised interest rates to between 3.75 and 4 percent, up from near zero at the start of the year, and currency traders expect the rate to top 5 percent next year.

While tighter policy has sent shockwaves through financial markets — even weakening the value of Berkshire’s massive stock portfolio — it’s finally starting to pay off for cash-strapped businesses and consumers.

Data from the Investment Company Institute showed that cash parked in money market funds that cater to everyday retail investors has swelled to record highs.

Buffett and Berkshire Vice Chairman Charlie Munger have over the past decade overseen a significant expansion of Berkshire’s cash holdings, which they see as crucial given the potential catastrophic payouts the company’s insurance company may one day have to make.

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

Berkshire’s insurance unit suffered an operating loss of $962 million in the quarter, with Geico warning that higher prices for used auto parts and an increase in accidents weighed on earnings.

Column Chart of Quarterly Interest and Other Income ($mn) Showing Higher Interest Rates Are Paying Off for Berkshire Hathaway

Buffett and Munger have long been able to withstand large losses in their insurance division because of the large “float” – insurance premiums it collects before it ultimately has to pay claims on obligations. That liquidity has helped fuel its investments in stocks and fund the company’s acquisitions of companies.

The sell-off in financial markets hampered Berkshire’s stock portfolio, which includes large stakes in Apple, American Express, Chevron and Bank of America. The company said its portfolio fell 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 A share, from a profit of $10.3 billion a year earlier, worth $6,882 per share. Buffett has long characterized the swings in his investment portfolio — which it must report on its income statements because of accounting rules — as “meaningless.”

The dozens of companies it owns, which are widely watched for signs of the health of the U.S. industrial and business complex, laid bare the resilience of the U.S. economy while signaling the potential Fed-engineered slowdown. Berkshire’s results also showed the effects of inflation and the battle for better wages as real living standards come under pressure from higher prices.

Revenue at its BNSF railroad rose 17 percent to $6.5 billion, but profits fell as freight volumes it shipped fell and it paid higher wages to its employees. The railroad became a flashpoint earlier this year when more than 30,000 unionized workers at BNSF threatened to strike, pushing back against conditions and demanding a pay raise.

A tentative agreement in September provided concessions to employees, and BNSF said wage costs rose 27 percent in the third quarter from a year earlier.

The energy companies in Berkshire’s utility division reported a 17 percent increase in revenue, boosted by higher energy costs.

But the company’s real estate unit saw sales fall by nearly a fifth, and operating profit at the unit plummeted 72 percent from a year earlier as the housing market cooled and it sold fewer homes.

Berkshire said higher mortgage rates were also expected to pressure its handful of companies in the housing sector. During the quarter, however, these companies – including brick maker Acme and flooring group Shaw – were able to raise prices and register strong demand.

Overall, operating profit rose to $7.8 billion from $6.5 billion a year earlier. Results were helped by higher profits in manufacturing and services.

Total return (%) line chart showing Berkshire outperforming both stocks and Treasuries in 2022

Berkshire, which this year bought a 21 percent stake in energy company Occidental’s common stock, disclosed that in the fourth quarter it would begin reporting earnings from the oil and gas giant as part of earnings.

The company also said it had spent just over $1 billion in the quarter buying back its own shares.

Berkshire’s Class A shares, which are down 4.1 percent this year, have significantly outperformed the broader market. The benchmark S&P 500 has fallen 20.9 percent, while an investor in U.S. Treasuries has shed 15.3 percent, according to Ice Data Services.

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