During their latest episode of the VALUE: After Hours Podcast, Bloomstran, Taylor, and Carlisle discuss Buffett’s BH Energy Provides Capital Allocation Training Wheels For The Next Guy. Here’s an excerpt from the episode:
Jake: I have a secret hypothesis that the BH Energy represents this awesome capital allocation training wheels for the next guy who comes in, because he can always stick it in there and earn a 10% ROE, let’s call it. Whereas if he has to be real clever about buying, let’s say, like Scott Fetzer. Okay, you don’t keep any money in there, that money is coming out. It has to be redeployed. The decision is so easy to just stick it into BHE, if you don’t have another opportunity set that’s obvious.
Christopher: Yeah, I’ve got a table in the letter, and I took the last five years of cash flow from operations, which totaled about $190 billion, I think, for five years, and then backed off depreciation, which is another $40 something billion dollars. So, you really have had $150 billion or so of deployable Capex. I showed where that’s gone. There were some years, a couple of years, 2020, 2021, I think, where the share repurchases were north of $25 billion a year. Last year, they spent most of their deployable Capex buying stocks in the market for the public common stock portfolio of the insurance operation. They did the same thing in 2018. That growth Capex is linear, but if you’ve got, say, $30 billion a year of operating income, of operating cash flows after depreciation expense to deploy, that’s 15% of the total which will grow.
Your rate base continues to grow as you add assets to the system. It’s just getting larger and larger, and it’s earning a regulated 10-ish return on invested capital. It’s a no brainer. For $5 billion is not chump change. As long as the opportunity set is there from a tax standpoint and from an economic return standpoint, it’s a great use of capital. But other utilities don’t get to enjoy it, because you have these publicly traded electrics that have dividend policies. You’re distributing two thirds of your profit as dividends.
Jake: All the compounding goes up–
Christopher: Even if you wanted to go spend the Capex, now, you’ve got to go raise new equity capital to run it back up. Berkshire is not saddled with that. There is no dividend policy. The parent gets nothing from the energy. You want that being reinvested at what is an acceptable and predictable return.
Jake: Yeah, imagine having a savings account with a 10% yield. It’s just keep– [laughs]
Christopher: Well, that’s how I look at Berkshire. If you buy the stock intelligently, and the thing earns 10.5 or 11 or 12 on equity, depending on what the stock portfolio does over time, how much better is that than buying a two-year treasury at 4%?
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