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Berkshire’s Record Quarter Got a Lift From Kraft

Katherine Chiglinsky
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Berkshire’s Record Quarter Got a Lift From Kraft

(Bloomberg) -- For Berkshire Hathaway Inc., profits from its stake in Kraft Heinz Co. were better late than never.

Almost a third of the jump in Berkshire’s third-quarter earnings came from finally recording its share of the packaged food giant’s 2019 results. A $467 million gain replaced what had been blank spots in the past two quarters as Kraft Heinz delayed reporting first-half results amid regulatory probes.

Kraft Heinz has been a black mark for Warren Buffett over the past year, as he took a $2.7 billion writedown in 2018 results and conceded he and 3G Capital paid too much in the 2015 merger of Kraft Foods Group Inc. and H.J. Heinz. The maker of ketchup and cold cuts replaced its chief executive officer in the search for a new strategy as consumers turn to upstart brands and fresher food options. A 24% share-price drop this year may mean another writedown for Berkshire.

“Results haven’t been good with regards to Kraft Heinz,” Jim Shanahan, an analyst at Edward Jones, said in an interview. “It’s certainly been a disappointment.”

While nine months of profit hitting in one quarter boosted Berkshire’s results, the bigger picture isn’t as rosy. Kraft Heinz profits going to Berkshire dropped 26% so far in 2019, and dividends fell 36%.

The stake has been a recent headache, but Buffett is a long way from being in the red. He’s still up almost $7 billion on his investments in Kraft Heinz, which total $17.5 billion since he and 3G first bought Heinz in 2013.

Here are the other key takeaways from Berkshire’s third-quarter results:

Railroad Record

Berkshire’s BNSF railroad overcame trade tensions, flooding and a slumping coal business to post a record profit in the quarter. While volume dropped in all four of its main categories, the unit said it benefited from higher rates and its ongoing efforts to rein in costs. BNSF said it returned to full operation in the quarter after floods earlier this year had closed off some of its routes.

BNSF’s results and gains on other stock bets pushed Berkshire’s 2019 net income to a staggering $52 billion, making the conglomerate the most profitable public company in the world.

Buybacks Climbing

Buffett has started to move past his aversion for stock buybacks, but he’s not exactly diving in. He repurchased another $700 million of stock in the third quarter, bringing 2019’s total to $2.8 billion. That’s already the record for a year, after the board in July 2018 loosened its policy on stock buybacks. Almost a decade ago, Buffett touted the fact that “not a dime” had gone to share repurchases.

Still, it’s a modest sum given Berkshire’s $128 billion cash pile and the buybacks of other large companies, especially financial firms. Bank of America Corp., which counts Berkshire among its largest shareholders, said in June that it planned to repurchase more than $30 billion of its stock over the next year.

Insurance Gain

A jump in property-casualty premiums at Berkshire’s reinsurance drove that unit’s first underwriting profit in more than a year. That helped cushion a 40% drop in Geico’s pretax underwriting earnings, which it attributed in part to higher severity in auto claims.

The reinsurance gain was in spite of $281 million in losses from Japan’s Typhoon Faxia, and the company warned that last month’s Typhoon Hagibis will weigh on fourth-quarter results. Berkshire is on pace for its 16th underwriting profit in the past 17 years, which Buffett has chalked up to his company’s “religion” of risk evaluation.

(Adds Berkshire’s 2019 net income in ninth paragraph.)

To contact the reporter on this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Ian Fisher

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