Warren Buffett's Annual Letter Names His Successor, Sort Of (BRK.A, BAC, IBM, AXP, KO, WFC)

The annual letter for Berkshire Hathaway Inc. (NYSE: BRK-A) is out and the discussion immediately jumps in about who will succeed Warren Buffett, book value, buybacks, and the portfolio.  Berkshire Hathaway’s book value per share rose 4.6% in 2011 versus 2.1% for the S&P 500 Index.  The formal book value was $99,860 per share and the closing price for 2011 was $114,755.  Friday’s closing price was $120,000.

Warren Buffett again has not disclosed exactly who will run Berkshire Hathaway when he retires, but he did disclose that the board of directors knows its selection (anticipated as seemless), and the hint is that it is not the new portfolio managers Todd Combs nor Ted Weschler.  The hint of two back-up candidates might imply them, but they are said to each manage a few billion dollars in 2012.  Regarding those two Buffett noted, “but they have the brains, judgment and character to manage our entire portfolio when Charlie and I are no longer running Berkshire.”

Buffett claimed that his five largest non-insurance companies (BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy) delivered record operating earnings in 2012 with more than $9 billion in cumulative pre-tax income in 2011.

We already had the public holdings of Berkshire (FULL HOLDINGS HERE) but the following were the big investments and stakes named:

a $5 billion 6% preferred stock of Bank of America Corporation (NYSE: BAC) which came with warrants to buy 700 million common shares at $7.14 per share any time before September 2, 2021;

63.9 million shares of International Business Machines Corporation (NYSE: IBM) at a cost of $10.9 billion (roughly $170.57 per share) for a 5.5% stake;

Counting the IBM stake, Team Buffett now has large ownership interests in three other companies: a 13.0% stake of American Express Company (NYSE: AXP); an 8.8% stake of The Coca-Cola Company (NYSE: KO); and a 7.6% stake of Wells Fargo & Company (NYSE: WFC).  On those stakes: “We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects.”

Berkshire Hathaway’s 110% of book value share repurchases only lasted a few days and the company was able to only repurchase $67 million worth of its shares.  Buffett’s logic is that 110% of book value is at a discount to intrinsic value, although he said that would be impossible to calculate.

As far as which person will run the company ahead, the thought of 24/7 Wall St. is that Ajit Jain will be in charge.  Our prior coverage of the 2010 annual letter showed Warren Buffet saying of Jain, “If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.” If that is not the world’s greatest praise, what is?

The full annual report from Berkshire Hathaway is here.

JON C. OGG