Warren Buffett: The Benefits of Good, Capital-Intensive Businesses

A look at some of the insights from the Berkshire annual letter

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Rupert Hargreaves
Mar 03, 2021
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In Berkshire Hathaway's (

BRK.A, Financial) (BRK.B, Financial) latest 13F report, the company revealed that it had acquired a substantial position in the telecoms group Verizon (VZ, Financial).

From my years spent Buffett-watching, I've noticed that this large investment in a business with high levels of capital equipment is not like Buffett's usual style. In fact, the Oracle of Omaha had advised against it in the past.

However, Buffett has expressed more interest in capital-intensive businesses lately, especially onces that have provided a steady return in recent years.

As Berkshire has become bigger and bigger, the number of asset-light high-quality opportunities for the company to invest in has dwindled. The group has thus been willing to invest more and more in asset-heavy industries.

Asset-heavy businesses

Buffett discussed this topic in his 2020 letter to shareholders. Berkshire's investments in "fixed assets" have now become so large, it reportedly owns more business infrastructure than any other U.S. company. Berkshire owns $154 billion in domestic fixed assets compared to the next largest owner, AT&T (

T, Financial), with $127 billion.

What's really interesting is the fact that AT&T is one of the businesses Buffett has singled out in the past for its high reliance on "fixed assets," which can be incredibly costly to maintain but produce relatively low returns on investment.

Nevertheless, the Oracle of Omaha went on to explain in his letter that asset-heavy companies can be good investments:

"Asset-heavy companies, however, can be good investments. Indeed, we are delighted with our two giants BNSF and BHE: In 2011, Berkshire's first full year of BNSF ownership, the two companies had combined earnings of $4.2 billion. In 2020, a tough year for many businesses, the pair earned $8.3 billion."

Buffett went on to highlight that since 2010, BNSF has invested $41 billion in fixed assets, "an outlay $20 billion in excess of its depreciation charges." Despite these capital requirements, it has also paid significant dividends to the holding company. As Buffett explained:

"BNSF has paid substantial dividends to Berkshire $41.8 billion in total. The railroad pays us, however, only what remains after it both fulfills the needs of its business and maintains a cash balance of about $2 billion. This conservative policy allows BNSF to borrow at low rates, independent of any guarantee of its debt by Berkshire."

Berkshire's other asset-heavy business, Berkshire Hathaway Energy, hasn't paid any dividends. Instead, the firm has reinvested its profits.

"Berkshire Hathaway Energy, unlike BNSF, pays no dividends on its common stock, a highly-unusual practice in the electric-utility industry. That Spartan policy has been the case throughout our 21 years of ownership. Unlike railroads, our country's electric utilities need a massive makeover in which the ultimate costs will be staggering. The effort will absorb all of Berkshire Hathaway Energy's earnings for decades to come. We welcome the challenge and believe the added investment will be appropriately rewarded."

Growth story

Berkshire Hathaway Energy is a real growth story. In the 21 years Berkshire has owned the firm, earnings have grown from $122 million to $3.4 billion. The company has been able to reinvest profits at a high rate of return consistently.

As Buffett explained in his letter, he expects this trend to continue for the foreseeable future. The company is building value for Berkshire shareholders. It is building assets that generate a return, which is then being reinvested back into more investments. The business is a true compounder.

Berkshire isn't taking any money out of the firm, but it does not need to at this point. One day the Berkshire Hathaway Energy growth will slow. At that point, it may be able to send vast amounts up to the holding company for Buffett to invest.

Disclosure: The author owns no share mentioned.

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Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.