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Berkshire Hathaway Benefits From US Tax Plan

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Berkshire Hathaway’s Warren Buffett
Photo:

rick wilking/Reuters

Warren Buffett

has one man to thank for

Berkshire Hathaway Inc.’s
BRK.A 0.87%

$29 billion windfall in 2017: President

Donald Trump.

The Omaha billionaire backed Mr. Trump’s opponent

Hillary Clinton

during the 2016 presidential campaign. But new tax cuts the president signed into law last December provided Berkshire with the sizable one-time gain that helped inflate annual profits to nearly $45 billion.

Other American corporations like

AT&T Inc.

and

Comcast Corp.

also booked large paper gains as a result of the new tax legislation.

Mr. Buffett, Berkshire’s chairman and a Democrat, expressed reservations last year about the need for corporate tax cuts. But he also said any drop in corporate taxes would benefit many of Berkshire’s businesses and its shareholders.

“I got a million shareholders at Berkshire Hathaway. And they would all love to see a corporate tax cut,” he said on CNBC in October. But, he added, “we have a lot of businesses, 60 or 70. I don’t think any of them are noncompetitive in the world because of the corporate tax rate.”

When asked on CNBC in January if he would have voted for the new tax law, Mr. Buffett demurred: “I would have had a different bill myself.”

The tax changes lowered Berkshire’s estimate of how much it would have to pay in taxes if it sold the stock investments it currently holds. Berkshire has around $100 billion in unrealized gains on equity investments, Mr. Buffett has said, and those gains are now expected to be taxed at a 21% rate, down from 35%.

The immediate net windfall for Berkshire was $29 billion, which helped push Berkshire’s net earnings to $44.94 billion in 2017 from $24.07 billion the prior year while offsetting declines in certain businesses. Berkshire’s operating earnings fell 18%, from $17.6 billion in 2016 to $14.5 billion in 2017, as hurricanes and other catastrophes caused losses in the company’s insurance operations.

Berkshire’s book value per share rose 23% in 2017, the company said, compared with a 22% total return in the S&P 500, including dividends. Its overall net worth increased by $65 billion, $29 billion from the tax benefits and $36 billion from operations.

Mr. Buffett said in a letter released to shareholders Saturday that the increase in the company’s net worth was “real” but “a large portion of our gain did not come from anything we accomplished at Berkshire.”

Berkshire Hathaway Benefits From U.S. Tax Plan

The annual letter from Mr. Buffett is widely read by investors and analysts. This year, the 16-page document was shorter than usual and left out some of Mr. Buffett’s usual themes on the economy and the future prospects of the U.S.

“This is a company that would like to hold itself up as having a superior business model and a superior strategy, yet the bump from the results came from something that was not their doing,” said Cathy Seifert, equity analyst at CFRA Research. “It was a very subdued letter.”

The tax gain is the latest example of how Berkshire has benefited from Trump’s election. The company’s stock price climbed in the months following the election on the expectation that reduced taxes and regulations would boost Berkshire’s businesses, which range from a railroad and utilities to industrial manufacturers and retailers.

Mr. Buffett also said last year that the company planned to sell some of its losing stock investments in 2017, when they would be more advantageous from a tax perspective. Berkshire sold shares of

International Business Machines Corp.throughout 2017 and sharply lowered its IBM stake in the fourth quarter.

However, at Berkshire’s annual meeting last May, Mr. Buffett said rising health-care costs were a bigger threat to the competitiveness of U.S. companies than taxes. Berkshire joined

Amazon.com Inc.

and

JPMorgan Chase

& Co. in January to form a new company to figure out how to reduce health-care costs for their employees. The company is in the early stages of planning, and Mr. Buffett didn’t write about it in his letter.

He did address the conglomerate’s growing cash pile and lamented the lack of well-priced acquisition opportunities. Berkshire’s cash, which is mostly invested in Treasury bills, ballooned to a record $116 billion at year-end.

“We will need to make one or more huge acquisitions,” Mr. Buffett wrote in his letter. Prices for businesses were too high for his taste in 2017, he said, but “our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.”

In October, Berkshire took a 38.6% stake in truck-stop company Pilot Travel Centers LLC, which will increase to an 80% stake in 2023. But two potential large deals fell through last year.

Kraft Heinz Co.dropped a $143 billion offer, which would have been partly backed by Berkshire, for

Unilever

PLC. And Texas power-transmission company Oncor terminated a deal with Berkshire’s utility arm in favor of a higher offer from

Sempra Energy.

Some of Berkshire’s 60-odd subsidiaries completed acquisitions, but those deals tend to be small. Berkshire spent $2.7 billion on bolt-on acquisitions in 2017, the company said, up from $1.4 billion the prior year.

Mr. Buffett also avoided giving any new hints about his succession planning after promoting two executives to vice chairmen last month.

He reiterated his advice that individuals should invest passively and avoid high money management fees while discussing the final tally from his bet that an S&P 500 index fund would outperform a basket of hedge funds over a decade.

Write to Nicole Friedman at nicole.friedman@wsj.com

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City reacts to Aurora Cannabis announcement

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“I’ve been talking a lot about Aurora around Medicine Hat since April of 2018 and celebrating the fact that they came here, chose us over Quebec or anywhere else in Canada they could have gone, and what a great thing it is for the community and the jobs and just the optimism,” he said. “I’ve sensed an increase of optimism in the community.

“When I heard this news yesterday, it was a setback, and I’m disappointed. They’re a private company, this has nothing to do with the City of Medicine Hat. They’re free to make any decision they need to make.”

In its report, Aurora cited lower than expected revenue from cannabis as a reason for the decision.

The decision about the construction will save Aurora a total of $190 million dollars.

Lisa Kowalchuk, executive director of the Medicine Hat and District Chamber of Commerce, says she believes Aurora remains committed to Medicine Hat.

“Aurora has very much been committed to our community and very invested in our community,” she said. “They re very engaged within our community and with our chamber. So I don’t see them going away anytime soon.”

CHAT News attempted to speak with Aurora Cannabis on Friday, but were instead provided a statement, which clarified its position from Thursday.

“There has been no halt to construction at the facility,” wrote Michelle Lefler, VP Communications at Aurora, on Friday. “We are continuing to build with adjusted timelines that are more closely aligned with how cannabis markets develop.

The statement continues, “We expect to have at least six flower rooms completed and in operation in 2020, for a total of 238,000 square feet, which includes the mother room. As was done with Aurora Sky and is the case with all Sky-Class facilities, we will pursue a phased approach to bringing additional grow rooms online, and still intend to build 30 grow rooms at Sun.”

“Additional operations at the facility will be activated as global demand develops, with a target date for full operations in 2021. Previously, we had intended to build at an accelerated speed. This is a more normalized pace for a project of this size and is aligned with how markets are growing.”

The company adds they remain committed to investment in Medicine Hat, and still intends to hire around 800 people to work at the facility once its completed.

Clugston adds he remains optimistic about the facility being completed.

We remain committed to investment in the Medicine Hat community as planned. At this time, we still intend to hire a final staff complement of around 800 people upon facility completion. We want to make sure that all local and government partners continue to work with us to support our commitments to significant investment in Alberta’s economy.

“As an optimist, they’ve shown interest and invested obviously a lot of money in the facility, and I really do hope and believe that it will be up and running at 100 per cent,” he said.

Clugston says council will meet with Aurora executives in a closed-door session prior to Monday’s city council meeting. He adds the meeting was planned before Thursday’s announcement.

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CN conductors union gives 72-hour strike notice

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Canadian National Railways conductors, trainpersons and yardpersons have given strike notice ahead of a Tuesday deadline.

The union, which represents 3,200 workers, provided the 72-hour notice today as contract negotiations continue over the weekend.

The Teamsters Canada Rail Conference warned in October it was prepared to launch job action after over six months of unsuccessful talks.

A strike could begin at 12:01 a.m. on Nov. 19 now that the notice has been provided.

The company says its offer to enter into binding arbitration was declined by the union.

The workers, who are mostly located in major urban centres across Canada, have been without a contract since July 23.

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CN Rail confirms layoffs

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CN Rail has made the “difficult decision” to lay off an unspecified number of workers and take other measures to reflect demand.

A spokesperson for CN said some employees would be placed on furlough and management and union job numbers would be cut “due to a weakening of many sectors of the economy.”

“These adjustments have already started to take place across the network,” senior media relations adviser Alexandre Boulé said in an emailed statement.

“CN would like to express gratitude to the employees who will be leaving the company and thank them for their service.”

He would not confirm how many jobs would be affected.

The news was first reported by the Globe and Mail on Friday afternoon, citing a source that was not authorized to speak publicly. The Globe reported that there would be roughly 1,600 job losses in North America.

According to its website, CN transports more than $250 billion worth of goods annually across its 32,000-kilometre rail network within Canada and the U.S.

The company says it has about 24,000 staff.

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