Warren Buffett's bet on Bank of America Corp. (BAC) and a more-generous buyback plan helped his Berkshire Hathaway Inc. (BRK/A) beat the Standard & Poor's 500 Index in a year when he didn't make a major acquisition.
Class A shares advanced 17 percent last year, beating the 13 percent gain in the S&P 500. The Omaha, Nebraska-based company is also poised to extend its record of outperforming the equity benchmark on Buffett's favored scorecard: the change in book value per share over time.
Buffett's stock picks and acquisitions have expanded Berkshire's book value, a measure of assets minus liabilities, more than 5,000-fold since he took control of the company in the 1960s. Shareholders had plenty to celebrate last year, including the profitable Bank of America wager, the performance of new investment managers, stronger earnings at some operating units and the buyback plan.
“You put it all together, and it paints a nice picture,” said Jeff Matthews, author of “Warren Buffett's Successor: Who It Is And Why It Matters” and a Berkshire shareholder.
Berkshire climbed 2.8 percent to $137,834 at 9:39 a.m., the highest level since 2008. Stocks and commodities surged after U.S. lawmakers passed a bill averting spending cuts and tax increases threatening a recovery in the world's biggest economy.
Buffett, Berkshire's 82-year-old billionaire chairman and chief executive officer, wrote to investors in February that he earns his paycheck if the company's per-share intrinsic value rises faster than the S&P 500. Because that number is hard to pinpoint, Buffett has said measuring book value per share is the best alternative.
Book value may have climbed to $113,579 a share on Dec. 31, according to an estimate from Meyer Shields, an analyst at Stifel Nicolaus & Co. That would give Buffett's firm a 7.8 percent annual growth rate for the five years ended 2012, compared with 1.7 percent for the S&P 500, including dividends. Berkshire typically discloses year-end book value per share in February when it releases annual results.
Part of those returns come from gains in Berkshire's $88 billion stock portfolio. Wells Fargo & Co. (WFC) and American Express Co. (AXP), two of Buffett's largest investments, both beat the S&P 500, climbing more than 20 percent last year.
Buffett has boosted investment returns in recent years with preferred stakes in companies including Goldman Sachs Group Inc. and General Electric Co. that sought Berkshire's backing and reputation as investor confidence waned. The latest bet, a $5 billion wager on Bank of America, may result in billions of dollars in gains.
The lender's shares doubled last year to $11.61 as CEO Brian T. Moynihan built capital and cut costs. Buffett's August 2011 investment gave Berkshire preferred stock paying a 6 percent annual dividend and 10-year warrants to buy 700 million of the bank's shares at $7.14 apiece. Exercising those options at the end of last year would have generated more than $3 billion in profit.
“It was a well-timed investment,” said Matthews, who is also a shareholder in Charlotte, North Carolina-based Bank of America. “It's proven he still has his chops.”
Berkshire has also benefited from investments made by Todd Combs and Ted Weschler, hedge-fund managers who joined the company since 2010 to help oversee the portfolio. Buffett has said the larger stock holdings are his picks while his deputies take smaller stakes. Among those bets are shares of Davita HealthCare Partners Inc., Phillips 66 (PSX) and Liberty Media Corp. All three companies gained more than 45 percent in 2012.
Weschler and Combs are probably “on average outperforming the S&P 500,” said David Kass, a professor at the University of Maryland's Robert H. Smith School of Business who has taken groups of students to meet the billionaire in Omaha. “That's a wonderful indication” that they were good hires, he said.
Buffett has increasingly relied on buying whole companies to boost returns. Acquisitions valued in the billions of dollars, which Buffett dubs “elephants,” were elusive in 2012, even as he struck smaller deals to buy party-supply retailer Oriental Trading Co. and more than 60 newspapers.
Takeovers from prior years continue to lift Berkshire. Profit at railroad Burlington Northern Santa Fe, Buffett's largest acquisition, rose 18 percent to $2.44 billion in the first nine months of the year from the same period in 2011, even as the industry struggled with declining coal shipments.
Berkshire's manufacturing, service and retailing businesses also posted stronger results, buoyed by the addition of Lubrizol Corp., an engine-additives maker that Buffett bought in 2011.
Units including Acme Brick, paintmaker Benjamin Moore and broker HomeServices of America are probably getting a boost from an improving residential real-estate market, said Stifel Nicolaus's Shields. Housing starts climbed to an 861,000 annual pace in November from 708,000 a year earlier, Commerce Department figures show.
Gains in those businesses may be overshadowed by results at insurance units like Geico that are facing claims from Sandy, the October storm that battered the U.S. Northeast, Shields said. Buffett has fueled his company's growth in part by investing float, or premiums it collects before paying claims. When the insurance units make an underwriting profit, the funds are free, he has said.
Buffett didn't respond to a request for comment e-mailed to an assistant.
Berkshire shares got a jolt last month after the company increased the threshold at which it would repurchase stock to 20 percent more than book value from 10 percent. The company also said that it had bought back $1.2 billion of Class A shares from the estate of a long-time investor. The stock climbed 2.4 percent the day of the announcement.
Boosting the amount Berkshire is willing to pay for its shares is welcome news for investors because it helps set a new floor for the stock and is an effective use of the company's growing cash hoard, said Tom Lewandowski, an analyst at Edward Jones & Co. The move could also revive a program that resulted in less than $100 million of buybacks through Sept. 30.
“Shares are cheap” even after the bump from the announcement, Lewandowski said. Buying back stock at the higher level “makes a lot of sense especially when you have $40 billion of cash on the balance sheet.”