Bloomberg reported on Tuesday that Berkshire Hathaway Inc., the conglomerate run by Warren Buffet, may announce a massive increase in its book value thanks to the new Tax Laws. The Congress passed a reform on Taxes that cut corporate taxes from 35% to 21% and closed some tax loopholes but kept some others.
Book value is a measure calculated by deducting liabilities from assets, is one of the major yardsticks that Warren Buffet uses to check progress in his conglomerate. According to analysts at Barclays Plc, the organization’s book value probably rose by 12% in the last quarter of 2017. This huge jump is basically because Berkshire Hathaway lowered its tax liability on appreciated investments. Berkshire said that it ended the month of September last year with $86.6 billion in income tax liabilities, most of which were deferred.
The Barclays analysts feel than thanks to this huge tax cut, the conglomerate’s operating revenue generation power could gain 12% on an ongoing basis. The operating revenue generation power is the revenue generated by the more than 90 subsidiaries under its umbrella, such as BNSF Railway or Geico. Morgan Stanley feels that the jump for Berkshire will be more in the range of 14%.
According to Reuters, this jump would take Berkshire’s value at about 1.39 times its book value, which would still keep the ration above the 1.2 value, at which stage Warren Buffet would authorize the re-purchase of shares.
While these changes thanks to the new taxes would not really add anything to the company’s cash and equivalents of $109 billion, Barclays said that if the conglomerate were to make any big, all-cash acquisition, then there would be an immediate boost in the company’s earnings per share.
Since Warren Buffet took over Berkshire Hathaway in 1965, the company’s book value per share has grown at an annualized rate of 19%, right up to 2016. This growth has beaten the S&P 500’s annualized growth of 9.7% annualized growth – including dividend payouts – for the same time period. Berkshire Hathaway does not pay out dividends to its investors.
Barclays has given Berkshire Hathaway an “overweight” rating. The analysts also increased its share price target for the company’s Class A shares from $322,500 to $357,000. This was done just three weeks after the company’s Class A shares touched the $300,000 mark for the first time. The company’s Class B share price target was also increased from $215 to $238 per share.
Berkshire Hathaway traditionally announces its end of the year results on the last Saturday of February. It is at this time that Warren Buffet’s annual shareholder letter is also released.
According to CNBC, Warren Buffet has long been against tax cuts, stating that despite having the highest tax rates in the world, his companies and others like them had been performing perfectly well on a global scale. He told CNBC last year in October that none of their companies were non-competitive in the world because of the corporate tax rates that they had.
While Warren Buffet’s conglomerate is the first of the corporates to see gains from the tax reforms, other companies are expected to follow suit with announcements regarding their gains from the new tax laws.
On Tuesday, Berkshire Hathaway’s Class A shares were trading at $303,100, a gain of $1,575. The company’s Class B shares also showed a slight gain of 64 cents to trade at $202.06.
Berkshire Hathaway’s share prices for both Class A as well as Class B shares went up by more than 22% in 2017.