2016: What's the outlook for Berkshire's free cash flow?
CLIFF GALLANT: One of the great financial characteristics of Berkshire today is its awesome cash flow.
While its simple earnings-less-capex formula yields an annual free cash flow calculation of, I figure, of around 10 to 12 billion, in reality it seems to be much higher, closer to 20 billion, and I think, in part, due to changes in the deferred tax asset year-to-year.
What is the outlook for free cash flow, and can investors continue to expect similar dynamics going forward?
WARREN BUFFETT: Yeah. There’s a lot of deferred tax that’s attributable to unrealized appreciation in securities. I don’t have the figure, but let’s just assume that’s 60 billion of unrealized appreciation in securities. Well, then there would be 21 billion of deferred tax.
That isn’t really cash that’s available. It’s just an absence of cash that’s going to be paid out until we sell the securities.
Some arises through bonus depreciation. The railroad will have depreciation for tax purposes that’s a fair amount higher than for book purposes.
But overall, I think of, primarily, the cash flow of Berkshire as a practical matter relating to our net income plus our increase in float, assuming we have an increase.
And over the years, float has added $80-billion-plus to make available for investment beyond what our earnings have allowed for, and that’s the huge element.
We’re going to spend more than our depreciation in our businesses, primarily, number one, because of the — well, the railroad and Berkshire Hathaway Energy are two entities that will spend quite a bit more than depreciation, in all likelihood, for a long, long, long, long time.
And the other businesses, unless we get into inflationary conditions, it won’t be a huge swing one way or the other.
So, our earnings, the 17 — not counting investment, not counting capital gains — but our earnings, which were — whatever they were, you know, around 17 billion — plus our change in float is the net new available cash. But, of course, we can always sell securities and create additional cash. We can borrow money and create additional cash.
But it’s not a very complicated economic equation at Berkshire. People didn’t — for a long time, they didn’t appreciate the value of float. We kept explaining it to them, and I think they probably do now.
The big thing, the goal, what Charlie and I think about, we want to add, every year, something to the normalized — you know, the normalized earning power per share of the company.
And we think we can do it because we should be able to do it. We have retained earnings to work with every year to get that job done.
Sometimes it doesn’t look like we’ve accomplished much, and we haven’t accomplished much.
And other years, we — something big happens, and we don’t know ahead of time which year is going to be which. Charlie?
CHARLIE MUNGER: Well, there are very few companies that have ever been similarly advantaged.
In the whole history of Berkshire Hathaway, we’ve lived in a torrent of money, and we were constantly deploying it, and disbursed assets, and we were wising up as we went along. That’s a pretty good system.
WARREN BUFFETT: It’s a —
CHARLIE MUNGER: We’re not going to change it.
WARREN BUFFETT: No. And it’s allowed for a lot of mistakes. I mean, that’s the interesting thing.
American business has been good enough that you don’t have to be — you don’t have to really be smart to get a decent result. And if you can bring a little bit of intellect, you know, then you should get a pretty good result.
CHARLIE MUNGER: What you’ve got to do is be aversive to the standard stupidities. You just keep those out. You don’t have to be smart.
WARREN BUFFETT: Thank God.
CHARLIE MUNGER: Thank God, right.