Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 20
Interesting breakdown from Adam Mead’s. Watchlist Investing email:
“I've seen the headlines about Buffett's "big mistake" in buying Kraft. The *actual* record isn't that terrible. IRR of almost 6% is more of an opportunity cost loss than a major blunder. Berkshire paid $9.8 billion, collected $6.3 billion in dividends, AND still has an asset worth $8.8 billion.
Also, don't forget: Berkshire wrote *up* its investment by $6.8 billion in 2015 after the merger. That's conveniently forgotten when discussing the (admittedly many) goodwill impairments.”
No. of Recommendations: 12
Berkshire paid $9.8 billion, collected $6.3 billion in dividends, AND still has an asset worth $8.8 billion...
It should be noted that the dividends that Berkshire received were not taxed at Berkshire, so that $6.3b is net. (Unless I have misunderstood equity method accounting yet again, which is certainly possible)
All of Berkshire's share of KHC's net earnings after tax are reported in net income at Berkshire's level, and Berkshire's tax liability does not change whether the investee's dividend payout ratio is 0% or 100%. The dividend money coming in the door is booked as return of capital, and (for less than obvious reasons) each dividend reduces the book value of the stake.
Normally this would be one of those things that makes a multiple of book value an even worse yardstick for the value of the firm over time, but the market value and true intrinsic value of this particular holding have been falling along with the booked value so in this case it doesn't really make a meaningful difference. Had they been prospering, there would have been a gap continually widening between booked value and intrinsic value. The simplified valuation of the firm would appear to be a faint silver lining to the poor performance of this investment : )
Jim
No. of Recommendations: 6
I think this might be mixing some things up.
It should be noted that the dividends that Berkshire received were not taxed at Berkshire, so that $6.3b is net. (Unless I have misunderstood equity method accounting yet again, which is certainly possible)
Equity method accounting relates to GAAP financial statements. Dividends received (in terms of cash flows) from the investee would generally be taxable to Berkshire, reduced by the Dividends Received Deduction.
All of Berkshire's share of KHC's net earnings after tax are reported in net income at Berkshire's level, and Berkshire's tax liability does not change whether the investee's dividend payout ratio is 0% or 100%. The dividend money coming in the door is booked as return of capital, and (for less than obvious reasons) each dividend reduces the book value of the stake.
This is true that the share of KHC income (net of tax) is reported on Berkshire's Income Statement. But it should be the case that the share of earnings creates a deferred tax liability when those are undistributed, and then an actual tax liability when those earnings are distributed (i.e., paid from KHC to Berkshire).
The reason that the dividend reduces the book value of the stake is pretty easy to understand. The investment account basically acts like a savings account that Berkshire controls: it increases when the underlying "account" (i.e., KHC's operations) earns money, and it decreases when the owner withdraws money from that account (i.e., Berkshire gets dividends from KHC). So the investment balance doesn't decrease each period as dividends are paid; it actually increases each period by Berkshire's proportionate share of undistributed income. You can see from Note 5 that Berkshire's carrying value increased from $12,937 in 2022 to $13,395 (millions) in 2024.
No. of Recommendations: 5
Equity method accounting relates to GAAP financial statements. Dividends received (in terms of cash flows) from the investee would generally be taxable to Berkshire, reduced by the Dividends Received Deduction.
Quite right. I used an LLM to summarize the relevant tax code section. Its summary was flat out wrong, and I couldn't follow the description in the referenced page either : )
The reason that the dividend reduces the book value of the stake is pretty easy to understand...
Well, yes and no. Yes, it is logical in its internal consistency, but not at all intuitive in the sense that the booked value over time is no longer any kind of approximation (however flawed) of true value as most investors would expect. And also not intuitive in the sense that it doesn't resemble the familiar result from smaller shareholding percentages. The shareholding in a typical growing firm paying dividends over time will be worth more and more, yet its carrying value will lose its connection to that if the payout ratio is big. At first it seems rather like booking the position at the book value of the investee (earnings move it up and dividends down), but it isn't that either.
Jim
