Berkshire Hathaway (BRK.A) released its much-anticipated 10-K and Warren Buffett's annual letter to shareholders moments after the stock market closed on Friday. As usual, Buffett's letter was entertaining, even though it seemed a little lighter than usual on the humor.
Buffett began by taking two swipes at himself. He said he failed to bag an "elephant" in 2012. By this he means a huge acquisition. Instead, Berkshire had to satisfy itself with a number of "bolt-on" investments. These are relatively small acquisitions made by Berkshire's many subsidiary companies. There were 26 such bolt-on purchases, but they amounted to only $2.3 billion in total. Of course, Berkshire did bag an elephant in H.J. Heinz, which it is acquiring with 3G Capital; but the Heinz acquisition is taking place in 2013.
Buffett also criticized himself for underperforming the S&P 500. He has longed compared the change in Berkshire's book value per share to the total return in the S&P 500. Berkshire's book value climbed 14.4% in 2012. The S&P 500 rallied 16.0% (including dividends). This underperformance, though very slight, should not be surprising. After all, as Buffett has warned many times in the past, Berkshire is now so large, it can't possibly do as well in the future as it has done in the past.
But this year's letter stood out for other reasons as well. First, Buffett waged a spirited defense of Berkshire's newspaper acquisitions. In fact, he devoted almost three pages of the 24-page letter to this task, even though Berkshire spent just $344 million to acquire 28 daily newspapers. That might be a large sum of money for ordinary corporations, but this is Berkshire Hathaway we're talking about. Compared to the tens of billions of dollars Buffett would like to invest in just one large elephant, it seemed a little odd that he found it necessary to wage a strong defense here. Buffett pointed out that the newspaper business is changing, yet he believes that local print newspapers will continue to thrive even as larger national papers struggle.
Second, Buffett also waged a spirited defense of Berkshire's policy of not paying dividends. In fact, critics have long pointed out the irony here. After all, Buffett loves to buy dividend-paying stocks. His "Big Four" stocks, American Express (AMX), Coca-Cola (KO), IBM (IBM), and Wells Fargo (WFC), paid Berkshire Hathaway $1.1 billion in dividends in 2012, yet Berkshire Hathaway's shareholders received exactly zero dollars in dividends. Buffett's defense of Berkshire's no-dividend policy was a lesson in financial theory. As long as Berkshire can earn a high enough rate of return on its investments, shareholders are better served if the company reinvests the earnings and refrains from paying dividends or buying back shares.
Finally, as he often does, Buffett chastised CEOs, blaming them for complaining about uncertainty and being too pessimistic about America's prospects. As he pointed out, this nation has faced many trials and tribulations; and no one ever knows for sure what tomorrow will bring. Yet the Dow Jones Industrial Average advanced "a staggering 17,320%" in the 20th century. And Buffett's humor finally came through when he stated, "If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you."