It’s that time of year again: Warren Buffett’s annual letter to shareholders is expected to be delivered on Saturday. The widely read missive usually blends a review of Berkshire Hathaway‘s operations with folksy wisdom and advice for investors.
While Thursday’s blow-up of Kraft Heinz, a big holding of Berkshire’s, certainly makes things more interesting, most people are less interested in the operating results of the conglomerate’s operations and holdings than they are in what Buffett will say about his $116 billion pile of cash and what he plans to do with it.
As he has in past years, Buffett is likely to use this year’s letter to explain that he hasn’t found anything to buy that isn’t overpriced or worth the money, save for a family-owned truck stop chain he picked up in late 2017. But he may use this year’s letter to talk about the environment for mergers.
He has complained about the high price of deals and CEO willingness to go along with it. In 2017, he said in last year’s letter, “prices for decent, but far from spectacular, businesses hit an all-time high. Indeed price seemed almost irrelevant to an army of optimistic purchasers.”
Berkshire’s last biggest deal was the $32 billion acquisition of Precision Castparts in 2016. But the company did flirt with some major transactions that never got off the ground, including a proposed mega deal for Unilever it pulled in early 2017 and an unsuccessful attempt to buy Texas utility Oncor that same year. Buffett has previously explained its unwillingness to take on cheap debt, which has been abundant, to do deals.
“Our aversion to leverage has dampened our returns over the years,” he said in last year’s letter, “But Charlie and I sleep well.”
Charlie is a reference to Charlie Munger, Buffett’s long-time lieutenant at Berkshire. Last year the two agreed to change a company policy that freed Berkshire to start buying back its own stock, which it did in the third quarter. People are eager to know whether Berkshire continued this repurchase plan in the fourth quarter, when a late-year market swoon might have presented a buying opportunity.
Berkshire has been adding to its investment portfolio, taking on a massive stake in Apple over the last three years as well as adding to its bank holdings and picking up new stakes in airlines. Buffett is typically a buy and hold investor, but last year Berkshire took on a $2 billion stake in Oracle in the third quarter only to dump it in the fourth.
Hurricanes may also factor into the discussion this year. Berkshire, one of the U.S.’s biggest property insurers, got hit in late 2017 by hurricanes in Texas, Florida and Puerto Rico and Buffett said last year that the “catastrophe-light period” the insurance industry had seen was not going to last forever. He could use this year’s letter to talk about the rising risks of catastrophe losses.
Finally, Buffett may write about his healthcare initiative with Amazon and J. P. Morgan. The venture was announced last year and aims to improve health care outcomes and lower costs for the three companies’ 1.2 million employees. Soaring health care costs have been a “hungry tapeworm” on the American economy, Buffett said last year.