$ 38 b cash-rich Warren Buffet unveils big acquisition plans

Monday, 28 February 2011 00:01 -     - {{hitsCtrl.values.hits}}

Warren Buffett is looking for acquisitions as an outlet to deploy his $38 billion cash pile, the legendary investor said in his annual letter to Berkshire Hathaway shareholders last week.

Buffett gave an aggressive earnings forecast for Berkshire’s collection of businesses, said the company would engage in record capital spending and forecast a recovery in the housing market would start within a year.

Foremost, though, was his acknowledgment of the need for Berkshire to expand its non-insurance businesses, a broad collection that most prominently includes the railroad Burlington Northern and the electric utility MidAmerican.

‘Our elephant gun has been reloaded, and my trigger finger is itchy,’ Buffett said.

The letter was released yesterday morning, as it is in most years — and many large investors say they get up early that day to read it the moment it comes online.

The so-called ‘Oracle of Omaha’ said Berkshire will need ‘more major acquisitions’ — with an italicised emphasis on major — to meet its goal.

One long-time Berkshire investor described the letter as ‘punchy’ and ‘confidently American,’ among other things.

‘I would say as an investor, I think it’s a very upbeat letter, it’s one that celebrates his courage on behalf of investors of going into the marketplace when the world was most fearful,’ said Gardner Russo & Gardner partner Tom Russo, who is one of the 15 largest holders of Berkshire Class A shares.

Buffett addressed the hot-button succession issue in the 26-page letter, something investors had anticipated given his age, 80, and the lack of a clear replacement.

Investment manager Todd Combs, hired late last year, will manage an initial portfolio of $1bn to $3bn, Buffett said, and Berkshire may add another one or two managers over time alongside him.

But Buffett said he will continue to manage the bulk of the portfolio while he is chief executive. Berkshire’s equity holdings topped $52bn at year-end.

He said less in the letter about who might follow him as chief executive of the company, though he said there were a number of good candidates. The most frequently tipped is David Sokol, chairman of MidAmerican and private jet service NetJets, who Buffett praised.

Buffett tends to give an economic outlook in his letter and this year’s was no exception.

‘A housing recovery will probably begin within a year or so,’ he noted, which has led Berkshire to ramp up spending and acquisitions at its housing-related businesses.

He was less bullish on interest rates, which have been low enough to earn the company a ‘pittance’ on its cash in recent times. He said rates will eventually rise enough to contribute more normal growth to the company’s investment income, but it was ‘unlikely to come soon.’

Another hit to the investment portfolio will come from the redemption of crisis-era preferred investments in Goldman Sachs and General Electric. Buffett said both are likely to be gone by year-end. The Goldman investment in particular famously pays Berkshire $15 every second.

All things being equal, Buffett forecast Berkshire’s ‘normal’ earnings power at about $12bn a year after tax.

Some of that will come from dividends, particularly in large holdings like drinks giant Coca-Cola and bank Wells Fargo.

Wells has been hamstrung on its dividend payouts by post-crisis regulatory oversight, but Buffett said that should ease soon, leading to an increase of ‘several hundreds of millions of dollars’ a year in dividend payments. He forecast Coke would pay Berkshire dividends of $376m this year, and he predicted that would double within another 10 years.

In the meantime, Buffett is spending on growth. He said Berkshire would make a record $8bn in capital spending this year, with the $2bn growth over last year to be spent entirely in the US.

‘Berkshire has created within itself its own outlet to redeploy capital,’ Russo said.