The earnings beside the buyback
Berkshire spent 9.6 billion dollars buying its own shares during the quarter. Over the same period, operating earnings fell from 13.485 billion dollars to 12.705 billion dollars. For continuing shareholders, those amounts raise the central capital-allocation question: does the economic value of the repurchased interest justify the price paid? The size of the expenditure cannot answer that question. I start with the operating earnings supporting the repurchase, then examine how many shares divide those earnings. This quarter, aggregate operating earnings weakened while the average share count also declined. The shareholder’s result reflects both movements.[1]
Net earnings fell more sharply, from 30.796 billion dollars to 22.112 billion dollars. Within that total, investment gains declined from 17.311 billion dollars to 9.407 billion dollars. Equity-portfolio valuation changes can move reported profit without an equivalent change in manufacturing or insurance operations. Berkshire’s operating earnings definition excludes those investment gains, and all the amounts are after tax. Following operating earnings and portfolio accounting in separate calculations helps explain the earnings supporting capital allocation. I also avoid treating operating earnings as immediately distributable cash: the disclosed earnings definition alone does not complete the cash-conversion calculation.[1]
Insurance beneath the aggregate
The operating table places much of the weakness in insurance. Underwriting earnings fell from 2.369 billion dollars to 1.352 billion dollars, and insurance investment income declined from 3.181 billion dollars to 2.734 billion dollars. BNSF earnings, by contrast, increased from 1.449 billion dollars to 1.729 billion dollars. Berkshire Hathaway Energy rose from 1.489 billion dollars to 1.612 billion dollars. Manufacturing, service and retailing businesses produced 4.042 billion dollars against 3.616 billion dollars. Treating the group average as the direction shared by every business loses that distribution. Management is allocating capital across a combination of stronger businesses and weaker insurance earnings.[1]
Operating earnings for the first nine months increased from 34.286 billion dollars to 37.034 billion dollars. That comparison limits an extrapolation of the quarterly decline into a description of the entire year. Equally, the nine-month increase cannot erase the latest quarter’s weaker insurance earnings. I use the periods to answer different questions: the quarter describes the recent earnings mix, while nine months show accumulated operating performance over a wider interval. Selecting a single permanent growth rate from these observations adds an assumption to the reported results. A repurchase assessment needs to make that assumption explicit.[1]
Bounding the denominator effect
Now change one assumption: hold operating earnings at 12.705 billion dollars and vary only the average share count. Average equivalent Class A shares fell from 1,438,223 to 1,426,372. Dividing unchanged earnings among fewer shares increases operating earnings per share; the effect is bounded by the ratio of those two share counts. This narrow calculation does not increase aggregate operating earnings or distributable cash. In the actual quarter, operating earnings also fell, so the benefit of the smaller denominator sits alongside a weaker earnings base. Attributing the entire average-share movement solely to this quarter’s repurchases would also require accounting for timing and other share movements.[1]
Assessing what the 9.6 billion dollars spent on repurchases adds for shareholders therefore returns to the price of the interest acquired. Spending 14.4 billion dollars over nine months does not automatically make the decision good or bad. Fewer shares give each continuing share a larger interest in future operating earnings; the purchase price is the cost of acquiring that interest. For me, Berkshire’s quarter shows why capital allocation needs to be assessed through business composition and share count. The large buyback headline can begin that calculation, incorporating weaker insurance earnings alongside gains elsewhere. A conclusion about value creation requires more than the amount spent.[1]