Warren Buffet And Goldman Sachs CEO Lloyd Blankfein Speak On Goldman's Detroit Investment Initiative
Getty Images/Bill Pugliano
By Noah Buhayar

Warren Buffett has assured shareholders of his Berkshire Hathaway (BRK-A) (BRK-B) that he has plenty of ways to deploy cash after posting record earnings in 2013.

In his annual letter, Buffett highlighted how Berkshire's energy unit will seek another takeover after a $5.6 billion acquisition, and he explained why a $12.3 billion investment to help take H.J. Heinz private was a template for future deals. The Berkshire chairman and chief executive officer also discussed subsidiaries' appetite to spend billions of dollars on smaller transactions, as well as equipment and plants. "Though we invest abroad as well, the mother lode of opportunity resides in America," Buffett wrote in the letter posted March 1, referring to his company's capital spending, which climbed to a record $11.1 billion last year.

Berkshire's ability to deploy the gusher of cash produced by dozens of subsidiaries is a top concern for Buffett, 83, almost five decades after he took control of the company. His stock picks and acquisitions created a business that generates more than $1 billion of profit a month. The firm, based in Omaha, Neb., doesn't pay a dividend and seldom buys back its own stock, which means Buffett and his deputies need to find other uses for the capital.

'Enormous' Potential of Energy Businesses

One area where Berkshire can invest is through its MidAmerican Energy unit. Buffett acquired most of the business in 2000. Since then, it has bought gas pipelines and U.S. utilities and committed billions of dollars to wind- and solar-power projects. In 2013, MidAmerican bought NV Energy, the largest electricity provider in Nevada. "NV Energy will not be MidAmerican's last major acquisition," Buffett said.

Focusing on energy investment makes sense, given how much cash Berkshire produces, said James Armstrong, president of Henry H. Armstrong Associates, which oversees about $500 million including Berkshire shares. "The problem Berkshire faces in the next 20 years is intelligent capital allocation of all that cash coming in," he said. "That's why they've turned toward energy. It's enormous. It's also stable, recurring, irreplaceable. It has some monopoly characteristics. It's got a lot of things you would want if your vault was bursting with cash."

Another way Buffett said he could get funds out the door is by completing deals similar to his investment in Heinz. In that transaction, Berkshire provided financing while Jorge Paulo Lemann's 3G Capital took charge of operations. Each owns half the equity. Buffett typically takes majority control and leaves management in place.

Since 3G's team took the reins at Heinz in June, the ketchup maker cut jobs, announced plant closings, grounded corporate jets and implemented policies to limit spending at the office. Buffett sought to allay shareholder concerns that the buyout resembled a private-equity deal, a type of transaction that he has criticized in the past for being too focused on short-term outcomes. "There is a crucial difference: Berkshire never intends to sell a share of the company," he wrote in the letter. "What we would like, rather, is to buy more."

Such collaboration may allow Buffett to pursue more deals said David Rolfe, chief investment officer of Berkshire investor Wedgewood Partners, which manages about $7 billion. There's also a benefit to having a partner that's willing to make cuts, he said. 3G is "doing the dirty work, in terms of efficiencies," Rolfe said. That allows Buffett to be a "financing guy who's going to be a benevolent owner in the out years."

A Sure Bet on America's Continued Prosperity

The CEO again highlighted deals by managers of other Berkshire subsidiaries. Together, the group agreed to $3.1 billion in acquisitions last year. Buffett has said such transactions, including the Marmon unit's $1.1 billion deal to buy a beverage-dispenser business, are among his favorites because they don't occupy much of his attention.

He also pointed out capital spending by Berkshire's units. In the last 15 years, Buffett bought a number of companies that require large outlays on plant and equipment. The biggest among them is railroad Burlington Northern Santa Fe, which Buffett acquired in 2010 in what he called an "all-in wager" on the U.S. economy.

Climbing earnings at BNSF helped annual profit at Berkshire rise 31 percent to a record $19.5 billion last year. Buffett's cash hoard ended 2013 at $48.2 billion. The U.S. will continue to create long-term investment opportunities like the railroad, a business that will play a major part in commerce a century from now, Buffett wrote in the letter.

"I have always considered a 'bet' on ever-rising U.S. prosperity to be very close to a sure thing," Buffett said. "Indeed, who has ever benefited during the past 237 years by betting against America?"
Buffett also told shareholders what to expect from the company's annual meeting on May 3. The event usually attracts tens of thousands of attendees to Omaha and showcases products from subsidiaries like See's Candies and Brooks, which makes running shoes.

The meeting's question-and-answer session with Buffett and Vice Chairman Charles Munger, 90, will again include a panel of analysts. Jay Gelb of Barclays will ask about insurance, joining Ruane, Cunniff & Goldfarb's Jonathan Brandt, who will cover other industries. Buffett is seeking to fill out the group with an investor who is betting on a decline in Berkshire shares, a role filled last year by Doug Kass. Three journalists are returning for a separate panel.


Three Takeaways From Buffett's Shareholder Letter

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coinman507

Buffet is a old gad fly,he and his buddy at microsoft ( Bill Gates ) made all of their money in the U.S.A. and then donate it to forgine countrys to help their people. It would be nice if some of that money was used here to help the needy and sick in this country ! how easily we forget who made them rich.

March 04 2014 at 5:57 PM Report abuse rate up rate down Reply
TINKDAY

Yes it is , if your rich or a corporation than you do not pay federal taxes and the laws do not apply to you, like they do to everyone else, so you can suck the wealth from the country with any means that work, because you will never be held accountable.

March 03 2014 at 10:30 PM Report abuse rate up rate down Reply
unitedpaintings

The Obama Administration sends the Mother Lode of BS,.

March 03 2014 at 2:51 PM Report abuse -3 rate up rate down Reply
ectullis

Really? Or does he mean China?

March 03 2014 at 1:19 PM Report abuse -2 rate up rate down Reply
alfredschrader

Buffett's stock picks and businesses are just the gravy, most of it is in cash or cash equivalents.
He made it selling insurance, not business acumen. Buffett doesn't even know what a mgabyte is.
A GEICO ad plays every 3 seconds somewhere.
Berkshire Hathaway resulted when Buffett needed a place to park the insurance billions.

March 03 2014 at 12:26 PM Report abuse rate up rate down Reply
calva69696666

did anyone believe this? id rather surf internet porn this read this crap.

March 03 2014 at 12:23 PM Report abuse -2 rate up rate down Reply
en4j

way to go homer, is this what the liberals scripted for you

March 03 2014 at 12:13 PM Report abuse rate up rate down Reply
Iselin007

I hope that positive report means jobs for those over Age 50!

March 03 2014 at 11:53 AM Report abuse -1 rate up rate down Reply