Warren Buffett's 2021 Annual Letter Highlights Berkshire Hathaway's 'Four Giants'

In Q4 2021, Berkshire Hathaway (BRK.A) delivered impressive financial results, exceeding analysts' expectations across earnings, revenue, and operating income.

Key Insights

• Berkshire Hathaway outperformed market forecasts with significant year-over-year growth in operating earnings across four of its five main business segments.
• Warren Buffett’s annual letter identifies the 'Four Giants' pivotal to Berkshire's performance: its insurance operations, Apple investment, BNSF Railway, and energy businesses.
• Buffett outlines three strategic avenues to enhance shareholder value: growing earnings from wholly owned businesses, investing in non-controlling stakes in outstanding companies, and executing share repurchases.
• The company holds more property, plant, and equipment than any other U.S. corporation, underscoring its vast infrastructure footprint.

Source: Data compiled from Visible Alpha analysts’ consensus

Berkshire Hathaway Q4 2021 Financial Overview

Berkshire Hathaway reported a 16.0% year-over-year increase in earnings per share (EPS), surpassing analyst estimates by 44.7%. Total revenues reached $112.9 billion, marking a 9.1% rise from the previous year and beating forecasts by 33.1%. This revenue total includes operating revenues from subsidiaries and pre-tax gains on investments and derivatives, calculated by subtracting the first three quarters' revenues from the full-year figure.

The firm recorded an after-tax net gain of $32.4 billion on investments and derivatives in Q4, a 5.0% increase compared to the same period in 2020.

Operating earnings, excluding investment gains, climbed 45.1% year-over-year to $7.3 billion, outperforming expectations by 15.9%. These figures reflect earnings after income taxes and exclude non-controlling interest earnings.

Berkshire repurchased approximately $6.9 billion of its own shares in Q4 2021, bringing total buybacks for the year to around $27 billion.

Over the past 12 months, Berkshire Hathaway’s shares delivered a total return of 23.2%, significantly outpacing the S&P 500’s 9.3% return.

Operating Earnings Breakdown

Chairman Warren Buffett encourages investors to focus on operating earnings generated by Berkshire’s diverse wholly owned subsidiaries, spanning insurance, railroads, utilities, and energy sectors. Recent GAAP changes require investment portfolio fluctuations to be reported in earnings, which Buffett criticizes for adding volatility.

Operating earnings rose across four of five segments: insurance underwriting shifted from a $299 million loss to a $372 million profit; insurance investment income slightly declined; railroad, utilities, and energy earnings increased; and manufacturing, services, and retailing saw gains. The 'Other' category, including goodwill impairments, improved from a loss to a profit.

Berkshire’s next earnings release for Q1 2022 is scheduled for April 30, 2022, coinciding with its annual shareholder meeting.

Highlights from Warren Buffett’s 2021 Annual Letter

On February 26, 2022, Warren Buffett shared his annual letter emphasizing strategic insights and Berkshire’s core strengths.

Business Investors, Not Market Timers

Buffett stresses that Berkshire invests in businesses with sustainable competitive advantages and strong leadership, focusing on long-term business performance rather than short-term stock market movements. "Charlie and I are not stock-pickers; we are business-pickers," he states.

Unmatched Infrastructure Ownership

Berkshire owns more U.S.-based infrastructure assets, classified as property, plant, and equipment, than any other American company. This extensive asset base supports its resilience and long-term growth.

The 'Four Giants' Driving Berkshire’s Value

Buffett identifies the insurance business, Apple, BNSF Railway, and Berkshire Hathaway Energy (BHE) as the four pillars underpinning the company’s value.

The insurance segment provides a timeless product with growth aligned to economic expansion and inflation, supported by integrity and substantial capital.

Apple, Berkshire’s second-largest holding by market value, contributed $5.6 billion to earnings in 2021, with dividends alone totaling $785 million. Berkshire’s 5.55% stake in Apple was valued at $161.2 billion at year-end.

BNSF remains a critical artery for American commerce, reducing carbon emissions by transporting goods via rail rather than trucks.

BHE achieved a record $4 billion in earnings in 2021, a dramatic increase from $122 million in 2000, with Berkshire now owning 91.1% of the company.

Combined, these segments generated $15 billion in net earnings for 2021, while other operating subsidiaries contributed $11.1 billion.

Strategies to Enhance Shareholder Value

Buffett outlines three main strategies: increasing earnings through internal growth or acquisitions (with current emphasis on internal growth), purchasing minority stakes in exceptional publicly traded businesses (though opportunities are limited due to high valuations), and repurchasing Berkshire shares when prices are attractive.

He notes that Berkshire’s stable, long-term investor base limits share buyback opportunities compared to companies with more speculative shareholders, which could increase price volatility and transaction volume, offering more repurchase chances.

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