Buffett's Berkshire Hathaway's Earnings Jump 20%

Warren Buffett's Berkshire Hathaway limited buybacks to $1.1 billion during the third quarter.

Billionaire Warren Bufffett's Berkshire Hathaway (BRK.A) - Get Berkshire Hathaway Inc. Report reported its operating profit increased by 20% during the third quarter while buybacks were limited to $1.1 billion, below its 2021 level.

Apple (AAPL) - Get Apple Inc. Report remains its top stock holding, followed by Bank of America (BAC) - Get Bank of America Corporation Report with oil giant Chevron (CVX) - Get Chevron Corporation Report as its third largest holding in its portfolio of stocks.

The conglomerate's operating profit increased to $7.8 billion after taxes, beating Wall Street expectations. The increase was the result of a gain the income from its investments as Berkshire made the right bets on higher short-term interest rates from its $109 billion of cash and equivalents.

Berkshire generated the large gain in profit even though Hurricane Ian generated a massive loss of $3.4 billion of losses before taxes or $2.7 billion after taxes in its insurance businesses.

Buffett's company has been in the insurance industry for decades as a major property and casualty insurer. It owns Geico, the second-largest auto insurance company after State Farm.

Buybacks Below 2021 Level

Berkshire Hathaway repurchased $1.1 billion in the third quarter, which mirrors the $1 billion it spent during in the second quarter, far less than the $3.2 billion that was bought back in the first quarter.

The company has slowed down its speed of buybacks in 2022 compared to when it allocated $7 billion in 2021.

"What may disappoint some investors is that Berkshire bought back less stock than many analysts expected given that Berkshire shares declined in value in the third quarter," Robert Johnson, a professor at the Heider College of Business, Creighton University, told TheStreet. "Many felt Buffett and his colleagues would have repurchased more stock."

Buffett has told Berkshire Hathaway investors for many years to focus on the company's operating profits because they more accurately demonstrate the company's financial performance instead of examining its unrealized gains from its equity holdings.

Berkshire's operating earnings after taxes per class A share increased by 23% to $5,290 in the third quarter, beating the FactSet consensus estimates of $4,200.

The company's overall earnings, which reflect unrealized losses of about $10 billion from its ownership in stocks, which totaled $305 billion on Sept. 30, showed a loss of $2.7 billion. In the period a year ago, Berkshire reported a profit after taxes of $10.3 billion.

Buffett has been a fan of Treasury bills and prefers to keep its cash holdings there. The company's timing helped it generate additional cash levels since rates were close to zero at the beginning of the year and now are yielding 4%.

"Additional good news for Berkshire shareholders is that with rising interest rates, the large cash hoard will earn more interest," he said. "The cash holdings of Berkshire actually rose by $4 billion in the quarter."

Berkshire's total cash and equivalents totaled at $109 billion on Sept. 30, compared with $105 billion on June 30 and $147 billion at the end of 2021.

The company closed its deal on insurer Alleghany in October, spending almost $12 billion, lowering its cash levels.

What Stocks Buffett Bought

Buffett, who works with two investment managers, Todd Combs and Ted Weschler, was not as active buying stocks during the third quarter.

Berkshire's total purchase of stocks totaled $4 billion of stocks. The conglomerate bought about $9 billion of stocks and sold $5 billion of stocks.

Buffett ramped up its stake in Occidental Petroleum (OXY) - Get Occidental Petroleum Corporation Report, spending $2 billion. Berkshire's holding is now above a 20% threshold during the third quarter.

Berkshire also holds $10 billion of Occidental preferred stock that is currently paying an 8% dividend yield and over 83 million warrants to buy Occidental stock at an exercise price of nearly $60 a share.

During the second quarter, Berkshire's net purchase of stock totaled $4 billion of stock. Buffett spent $41 billion during the first quarter when he bought about $20 billion of shares in Chevron.

Berkshire now owns 170 million shares after buying six million shares of Chevron during the third quarter, bringing its stake to a value of $31 billion, according to its third-quarter 10Q filing on Nov. 5.

The stake in Apple remains the same at 915 million shares, valued at $127 billion.

Apple's position dominates the investment portfolio at over 40%, Johnson said.

"What has happened over the past few years is that the investment portfolio has become much more concentrated," he said. "Apple, Bank of America, Chevron, Coca Cola and American Express combine for more than 75% of the high conviction portfolio."

Despite extreme volatility in both the equity and bond markets so far this year, Berkshire's class A shares have declined only by 4% to $432,000 while the S&P 500 index plummetted by 20%.