Warren Buffett Annual Shareholders Letter [HIGHLIGHTS]

On Friday, Warren Buffett released his Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) annual shareholders letter and annual report.

For 2012, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) saw a $24.1 billion gain with $1.3 billion used to repurchase stock. This left the company with an increase in net worth of $22.8 billion for 2012. Its per-share book value for both Class A and Class B stock jumped by 14.4%.

Over the last 48 years (since present management took over), book value has increased from $19 to $114,214; this is a 19.7% rate compounded annually.

Here’s highlights from the letter:

Disappointments

– Warren Buffett considered the $24.1 billion gain “subpar.” He notes that for the ninth time in 48 years, Berkshire’s percentage increase in book value was lower than the S&P’s percentage gain. In eight of those nine years, the S&P had a gain of 15% or more. He commented, “We do better when the wind is in our face.”

– Whatever Berkshire’s results are, Warren Buffett and his partner Charlie Munger, the company’s Vice Chairman, will not change their yardsticks. Warren Buffett believes it is their job to increase intrinsic business value – for which book value used is a significantly understated proxy – at a faster rate than the market gains of the S&P.

– An inability to make a major acquisition. Warren Buffett pursued a few “elephants,” but came up empty-handed. But things have changed early in 2013. In February, Berkshire agreed to purchase 50% of a holding company that will own all of H. J. Heinz Company (NYSE:HNZ). The other half will be owned by a small group of investors led by Jorge Paulo Lemann, the renowned Brazilian businessman and philanthropist.

– Lemann’s Group and Berkshire will each contribute about $4 billion for common equity in the holding company. Berkshire will also invest $8 billion in preferred shares that will pay a 9% dividend.

Good News

– Berkshire’s five most profitable non-insurance companies earned more than $10 billion pre-tax in 2012.: BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy. This “powerhouse five” had aggregate earnings of $10.1 billion, about $600 million more than in 2011. Warren Buffett believes this group will again bring strong returns this year.

– The managers of Berkshire’s subsidiaries had a record year for “bolt-on” purchases, spending about $2.3 billion for 26 companies that were folded into existing businesses. These transactions were completed without Berkshire issuing any shares.

– Insurance operations went lights out in 2012, giving Berkshire $73 billion of free money to invest. They delivered a $1.6 billion underwriting gain–the tenth straight year of profitable underwriting. GEICO led the way.

– Year-end employment hit a record 288,462, up 17,604 from last year. Its headquarters crew remained unchanged at 24.

– The “Big Four” investments had a good year and their positions increased during 2012: American Express Company (NYSE:AXP), The Coca Cola Company (NYSE:KO), International Business Machines Corp. (NYSE:IBM) and Wells Fargo & Company (NYSE:WFC). Its ownership interest in each of these companies increased during the year and 2012 earnings amounted to $3.9 billion.

– A record $9.8 billion was spent on plant and equipment in 2012: 88% came in the United States. This represented a 19% increase from 2011–the previous high.

Summary

Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) hopes to build per-share intrinsic value via five ways:

Improving the earning power of many subsidiaries
Further increasing earnings through bolt-on acquisitions
Participating in the growth of investees
Repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value
Making an occasional large acquisition and trying to maximize results, by rarely if ever, issuing Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) shares.

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