Berkshire Profit Jumps to $3.1 Billion on Derivatives

Warren Buffett’s Berkshire Hathaway Inc. said fourth-quarter profit jumped on the recovery of derivative bets tied to the world’s stock markets.

Net income rose to $3.06 billion, or $1,969 a share, from $117 million, or $76, in the same period a year earlier, the Omaha, Nebraska-based company said today in its annual report.

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The profit increase, Berkshire’s third straight, helps rebuild a cash pile that diminished since 2007 as Buffett invested in financial firms bruised by the recession. Companies including Goldman Sachs Group Inc. that turned to Buffett for funding are now paying Berkshire interest of 10 percent or more. The shopping spree culminated with the November agreement to buy railroad Burlington Northern Santa Fe for $27 billion.

“We’ve put a lot of money to work during the chaos of the last two years,” Buffett said in his annual letter to shareholders today. “It’s been an ideal period for investors: A climate of fear is their best friend.”

Berkshire had net income of $8.06 billion for all of 2009, a 61 percent increase from the year before. Rising stock prices helped boost book value to $131.1 billion, a 4 percent increase since Sept. 30. The figure gained about 20 percent from the end of 2008.

Buffett typically highlights book value, the measure of assets minus liabilities, in the first sentence of his annual letter to shareholders. In his “owner’s manual” for Berkshire shareholders, Buffett says he considers the figure to be the best objective measure of a company’s success.

Derivative Gains

Derivatives added $1.05 billion to earnings in the quarter, compared with a loss of $4.61 billion a year earlier after the collapse of Lehman Brothers Holdings Inc. Liabilities on Buffett’s so-called equity-index puts narrow when four stock indexes, including the Standard & Poor’s 500, climb closer to the levels they were at when Buffett made the deals near the market’s peak in 2006 and 2007.

Berkshire’s own stock has gained 52 percent in the past year as derivatives rebounded and the value of the firm’s top stocks rose. The Class A shares closed yesterday at $119,800, their highest since Oct. 21, 2008.

The 20 largest holdings in its U.S. portfolio all increased in the past 12 months. Coca-Cola Co., Berkshire’s top holding, climbed 29 percent. Wells Fargo & Co. doubled and American Express Co. tripled. The U.S. portfolio was valued at $57.9 billion at Dec. 31, a 12 percent rise from a year earlier.

NetJets Loss

The NetJets unit, which leases planes to corporate customers and individuals, posted a $180 million pretax loss for the quarter, bringing the full-year deficit to $711 million on asset writedowns and the cost of cutting staff.

“NetJets is likely to operate at a profit in 2010, assuming there is no further deterioration in the U.S. economy or negative actions directed at the ownership of private aircraft,” Berkshire said in today’s report. The unit earned $213 million in 2008.

Buffett added a $2.6 billion investment in Swiss Reinsurance Co., completed in March, to a portfolio of financing deals that he struck during the credit freeze as other investors were withholding funds. The Swiss Re transaction pays a 12 percent coupon, while Berkshire gets 10 percent annually on its $5 billion injection in Goldman Sachs and its $3 billion of preferred shares in General Electric Co.

Railroad Replacement

Berkshire joined the S&P this month after completing the takeover of Fort Worth, Texas-based Burlington Northern. The move prompted managers of funds that attempt to recreate the returns of the index to add Buffett’s company to their portfolios.

Buffett cut jobs and reshuffled managers at Berkshire’s operating companies last year as retail and industrial demand suffered in the recession. He replaced the CEOs of NetJets, the luxury flight provider, and jeweler Helzberg Diamond Shops Inc. This month, Berkshire reported its workforce fell by 9.8 percent since the end of 2008 to 222,000 employees.

Buffett was stripped of his final AAA credit grade from a major rating firm this month when Standard & Poor’s downgraded Berkshire. The cut, which followed reductions last year by Fitch Ratings and Moody’s Investors Service, came as Berkshire neared the completion of the Burlington Northern takeover.

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