Why Warren Buffett puts BNSF ownership on par with Apple stock in Berkshire Hathaway
Fort Worth-based BNSF Railway featured prominently in Warren Buffett’s annual letter to Berkshire Hathaway shareholders.
After starting his letter by describing property and casualty insurance as the heart of Berkshire’s business, Buffett wasted no time getting to the railroad.
“Our second and third most valuable assets – it’s pretty much a cinch at this point – are 100% Berkshire owned by BNSF, America’s largest railroad measured by freight volume, and our 5.4% stake in Apple, ”said Buffett, who regularly praises BNSF executives in the letter that is part of Berkshire Hathway’s closely watched annual meeting.
Buffett went on to describe the company’s 91% stake in Berkshire Hathaway Energy as his fourth best asset. “What we have here is a very unusual utility company, whose annual profits have gone from $ 122 million to $ 3.4 billion over our 21 years of ownership,” he said. he declares.
Buffett later told shareholders that Berkshire is the nation’s largest owner of buildings, factories and equipment with assets totaling $ 154 billion. BNSF and BHE, the company’s energy unit, represent a significant portion of these real estate assets.
“Large cap companies can be good investments, however,” he said. “Indeed, we’re thrilled with our two giants – BNSF and BHE: In 2011, Berkshire’s first full year of BNSF ownership, the two companies made a combined profit of $ 4.2 billion. In 2020, a tough year for many companies, the pair made $ 8.3 billion. “
He acknowledged that the BNSF and the energy company will require significant capital spending for decades to come.
“The good news is that both are likely to generate appropriate returns on the additional investment. Let’s look at BNSF first. Your railroad carries approximately 15% of all non-local ton-miles (one ton of freight carried over one mile) of freight moving through the United States, whether by rail, truck, pipeline, barge, or plane . BNSF’s charges far exceed those of any other carrier, ”he wrote.
Berkshire has invested $ 41 billion in fixed rail assets since acquiring BNSF in 2010 for $ 44 billion.
“Railroading is an outdoor sport, with kilometer-long trains forced to operate reliably in extreme cold and heat conditions, as they constantly encounter all forms of terrain, from deserts to mountains, ”Buffett told shareholders. “The BNSF has 23,000 miles of track, spread across 28 states, and must spend whatever it takes to maximize safety and service throughout its vast system.”
Buffett also praised BNSF for its ability to deliver substantial dividends to Berkshire shareholders – $ 41.8 billion in total.
“The railroad pays us, however, only what is left over after both meeting the needs of its business and maintaining a cash balance of about $ 2 billion,” he said. “This conservative policy allows the BNSF to borrow at low rates, regardless of any guarantee of its debt by Berkshire. “
He credited retired CEO Carl Ice and new CEO Katie Farmer with an increase in BNSF profit margin of 2.9 percentage points in a pandemic-plagued year that saw the volume of goods transported decrease by 7%.
“Your railroad is in good hands,” he said.
Read Buffett’s full letter here.