Berkshire Hathaway normalized after-tax look-through earnings at $18 billion

By my estimate, Berkshire Hathaway’s normal earning power after tax is approximately $18 billion. This puts the stock at an adjusted P/E ratio of 11x based on today’s share price.

To get there, I assume the following:

  • Redemption of GE, GS and Swiss Re preferred
  • Normalized but still low interest rates
  • Normalized dividend for Wells Fargo and U.S. Bancorp
  • 2012 dividend increase per consensus estimates
  • IBM full-year dividend
  • Full-year earnings for Lubrizol
  • A more normal housing environment

Following Buffett, I also include undistributed earnings from Berkshire’s large equity holdings.

No adjustment has been made for Berkshire’s large cash holdings which I expect will approximate $40 billion after Q1, 2012, assuming no major purchases. This equates to almost $25,000 per A share.

Here is my data.

 

 

 

 

 

 

 

 

 

 

I welcome your comments on these adjustments and your thoughts on Berkshire Hathaway’s valuation.

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5 thoughts on “Berkshire Hathaway normalized after-tax look-through earnings at $18 billion

  1. Greg Speicher Post author

    I am posting an interesting comment made at Gurufocus,com on my article from maxman along with my response.

    Thanks for posting, very useful.

    A few comments.

    You are using a 30% tax rate ($5,850/$19,500=30%) including on the pre-tax earnings for BNSF and Mid-American. However, on p. 11 of the 2011 AR, they show the after-tax earnings for these two and the tax rate is higher than 30%. Why not just use the actual after-tax numbers shown on p. 11 (or adjust your tax numbers to use the actual tax figures given on p.11)?

    How are you arriving at your $4,380bn number for Look-through equity earnings? To the extent that the dividends received on these investments are already captured in your numbers in the top line 2011 pre-tax investment income, then only the undistributed part of the Look-through equity earnings should be added back. Note that Buffett said this number was “over $2 billion” in 2010 (see 2010 AR, p. 17) which is a lot less than your number of $4.38bn for 2011. Finally, this undistrubuted Look-through earnings number should be tax affected (15%, I believe) as they would be taxable if paid through to BRK; though, there’s an argument that this should be discounted to take account of tax deferal since those companies are retaining those earnings. If they were approximately $2.0bn in 2010, as Buffett suggested, and if we assume 15% growth for 2011, this gives $2.3bn pre-tax, or $1.95bn after a 15% tax assumption, for 2011.

    Reply
    1. Greg Speicher Post author

      Maxman, thanks for the questions/comments.

      Regarding the tax rate, I am following Buffett who used a tax rate of 30% when giving his estimate of normal earnings in his 2010 shareholder letter. He estimated pre-tax earnings to be $17 billion and after-tax earnings to be $12 billion. $5 billion/$17 billion = 29.4%. This figure may increase if Berkshire’s earnings mix changes to more heavily taxed businesses. I welcome your thoughts on a more appropriate tax rate for Berkshire going forward. My rate may be low given the strong earnings from BNSF which are at a higher rate.

      To arrive at my $4.380 billion figure I first calculated Berkshire’s share of total earnings (before any distributions) by simply multiplying 2012 consensus EPS figures times Berkshire’s share holdings. This came to $6.493 billion. I then subtracted my estimate of Berkshire’s 2012 dividend income from those holdings, again based on 2012 dividend estimates. This figure was $2.11 billion and is included in my estimate of investment income in the spreadsheet above.

      The difference is the $4.380 billion included in my estimate of look-through equity earnings. There is no double counting.

      Regarding Buffett’s comment about retained earnings being “over $2 billion” in 2010, my own estimate of 2010 earnings was $2.7 billion net of dividends. Buffett may have been being conservative in how he phrased it. 2012 will include Berkshire share of IBM’s earning which will be approximately $750 million. These were not included in the 2010 figure given by Buffett, as shares were purchased in 2011. The rest of the difference can probably be explained by a recovery in earnings coupled with normal growth in earnings from reinvested retained capital over the two-year period.

      Finally, in response to your question about taxes on retained earnings, I believe taxing them at 15% against current earnings is too high. The vast majority of this capital is invested in “permanent holdings” which will likely be held for at least another ten years and arguably much longer. Each investor will need to make their own estimate of the present value of this tax liability. I think it can be very reasonably argued that it is likely to be far smaller than you suggest.

      Offsetting the tax liability are considerable value in Berkshire’s BAC warrants, which I did not include and the value of Berkshire’s cash. This cash – reasonably around $30 billion if Buffett retains a minimum cash buffer of $10 billion – has significant optionality if redeployed for share repurchases, acquisitions or equity investments.

      Again, I appreciate your thoughtful questions. It helps us all get a a better understanding of an appropriate valuation for Berkshire. I welcome your further comments.

      Reply
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  3. VPD

    Great job Greg…can tell you’ve put time and thought into your analysis.

    Couple of thoughts:

    i) Agree with 30% tax rate. Looking at past 3-years this has been the effective rate

    ii) Why are you including Lubrizol earnings @$700m vs. $1.0bn?

    iii) Any color on the “Eliminations”?…looking back several years these do not seem to necessarily be a consistent or constant line item…took a quick look at 10K but couldn’t find any explanation for this. If it is a consolidating adjustment than it should be at least what it was last year ($800m)…if it is non-recurring than estimating it as you did is overly conservative (normalized would be zero).

    iv) Curious about the $240m increase in dividends (ex-WFC & USB). If this adjustment is conservative than it has an “aggressive” result on the valuation as it will lower investment income (which is taxed at 30% vs. the look-through which you are sheltering…btw agree with your taxation method there).

    v) The analysis may be mixing apples and oranges a bit in terms of timing. Some of the earnings are normalized/adjusted to reflect 2012 while the operating businesses are using 2011 earnings. It may make sense to adjust the 2011 operating earnings (i.e. apply growth rate of [15%]) so that all earnings are 2012 normalized estimates….this will give a true 2012E P/E.

    Hope this is helpful and thanks for the great post,

    Vic

    Reply
    1. Greg Speicher Post author

      Vic,

      ii) (Lubrizol) – Approximately $300 million was already included in reported 2011 earnings.

      iii) (Eliminations) – The 10-K gives no color on this item. I was not sure how to handle it and figured calling Berkshire for an explanation would probably go nowhere (although perhaps I would be pleasantly surprised). Decided to split the difference and go with a 5-year average. I can’t defend my position because I don’t understand what is driving this item other than to observe that it appears to be recurring. If you or another reader can help here, it would be most helpful.

      iv) (WFC and USB dividends) – You make a good point. Bottom line, I think these higher payout ratios are likely post-Basel III. They reflect the historic payout ratios on these two banks and arguably are a tad low.

      v) I think you are spot on with this comment. Operating earnings should arguably be raised mid to high single digits to reflect continued recovery and incremental returns on retained capital.

      Your thoughtful comments are much appreciated.

      Reply

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