Earnings at
Berkshire Hathaway
of
Large utilities have grown more than 30-fold since Warren Buffett bought the core of that business in 2000, a testament to CEOs’ patient approaches to building businesses and wealth for their shareholders. showing power.
If this business, Berkshire Hathaway Energy, were to go public, it would be the second largest in the United States by market capitalization. His 20 years of reinvesting earnings instead of paying them to shareholders have made a modestly sized Iowa utility company one of Buffett’s most successful in his 57 years at the helm. It turned into a giant company that attaches.
“BHE has been able to grow significantly faster than its peers, largely based on its relationship with Berkshire Hathaway,” Edward Jones analyst Jim Shanahan wrote in an email. Barons“Most pure utilities target a (dividend) payout rate of 60-70% of revenue. We can focus on investments and acquisitions.”
BHE retains all earnings.
Berkshire Hathaway (NYSE: BRK/A, BRK/B) initially invested about $2 billion to purchase MidAmerican Energy, the company’s core Iowa utility. Since then, Berkshire Hathaway Energy’s after-tax profit has grown from $122 million to $4 billion.
Berkshire Hathaway Energy isn’t publicly traded, but it bought back a 1% stake in the business in June from Berkshire executive Greg Abel, who is seen as likely to replace Buffett as CEO. was noticed. BHE paid $870 million for that 1% interest, according to Berkshire’s second-quarter 10-Q filing released in early August.
It values the company at $87 billion.
duke energy
(DUK) and
Southern Company
.
(SO), the 2nd and 3rd largest electric utility in the country by market price.that’s all
next generation energy
(NEE) is more valuable in the stock market.
Buffett himself may have set the price at $870 million. The CEO said at Berkshire’s annual meeting in April that it would be easier to make a deal dealing with his stake while Abel was still “alive,” and the board said “It gives him a lot of freedom,” he said.
“Without me around, directors are pressured to do whatever the lawyers say, lawyers tell them to do this or that, and they hire investment bankers to create value. I hope to bring it,” Buffett said. “And from that point on everything is a game.”
The price, at about 22 times BHE’s net profit last year, looks fair in line with other big power companies.
BHE’s value has risen significantly since early 2020, when BHE bought back shares from Berkshire board member Walter Scott, who died last year, at around $53 billion. Berkshire now owns 92% of his BHE, with Scott’s estate holding his remaining 8%. There is speculation that Scott’s estate may be looking to sell its interest this year.
BHE is a sprawling company that owns electric utilities in the Midwest and West Coast, with one of the nation’s largest portfolios of wind and other renewable energy, as well as some natural gas that transports 15% of U.S. gas. I own a pipeline. He also holds a valuable 8% stake in BYD, a large real estate brokerage business, a UK utility business and a Chinese car and battery company.
BYD’s shares are worth nearly $8 billion. BHE paid him just $232 million on his BYD profits in 2008. The idea was endorsed by Berkshire’s Vice Chairman Charlie Munger.
In a letter to shareholders earlier this year, Buffett said, “BHE has become a utility powerhouse (stop groaning) and a major player in wind, solar and power transmission.
Utilities are growing steadily because like Berkshire, they are reserving profits for expansion and can expand their operations without needing a lot of capital from their parent company. This contrasts with investor-owned companies, which often pay out his 60% or more of profits as dividends. BHE has also accumulated a large amount of debt that BHE can pay off, most of which are regulated utilities that guarantee more or less secure returns.
In a 2020 letter to shareholders, Buffett said, “Unlike the railroads, our power companies will need a major retrofit, and the ultimate cost will be staggering.” We welcome the challenge and believe the added investment will be rewarded appropriately.”
Utilities can often earn a return on equity of around 10%. Berkshire did not respond to a request for comment on BHE.
Chris Bloomstran, Chief Investment Officer, Semper Augustus Investment Group, St. Louis, said: , a Berkshire holder.
Berkshire’s success with BHE is no different than any other Buffett coup. These include
apple
(AAPL) shares are currently valued at over $150 billion, and their 2010 acquisition of the Burlington Northern Santa Fe Railroad is now valued at approximately $150 billion.
Then came a well-timed purchase
coca cola
In the late 1980s, it bought (KO) stock, now worth more than $25 billion, and in the late 1960s, it bought National Indemnity, an insurance company at the heart of Berkshire’s sprawling insurance business. Berkshire has a market capitalization of approximately $650 billion.
In its September 2021 82-page investor presentation, BHE outlined its business and financials. Its U.S. utilities serve his 5.2 million customers, and he has invested $35.5 billion in renewable energy, primarily wind power, with another $4.9 billion by 2023. were planning to spend on renewable energy.
Total capital expenditures, including investments in large-scale power grids, are projected to average $8 billion annually from 2021 to 2023. The company has used tax law to receive nearly $1 billion in income tax credits related to wind power in 2021 and 2020. power.
Abel, who leads Berkshire’s large non-insurance business, was CEO of BHE from 2008 to 2018 before moving to his current job at the parent company. He served as president of BHE from 1998 until 2008, when he put together a significant record in positioning him as Buffett’s successor, who will turn 92 on August 30.
As an executive at MidAmerican, he acquired a 1% stake primarily through an option grant. BHE isn’t publicly traded, but the price BHE paid for his shares in Abel has been worth more than 30 times his share since Berkshire bought the company in 2000. means that it is Since then, it has risen only slightly.
Write to Andrew Bary at andrew.bary@barrons.com
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