For the most glaring example of Trump tax cuts benefiting the rich, look no further than Warren Buffett.
According to an analysis by Barclays analyst Jay Gelb, Buffett’s Berkshire will be among the greatest beneficiaries of US corporate tax reform. The bank calculates that Berkshire Hathaway’s 4Q book value could see a huge boost of as much as $37 billion (12% increase from 3Q 17 level) resulting from the US corporate tax reform due to a decline in its deferred tax liability (DTL). The one-time increase will result from Berkshire lowering its tax liability on appreciated investments.
We would view this magnitude of book value increase as favorable for BRK shares since it is generally valued based on price-to-book value. Based on substantial net unrealized equity investment gains during 2017 and a lowered US corporate tax rate, we estimate Berkshire’s DTL could be $37bn lower (with a corresponding increase to its book value) than it would have been without tax reform.
While Barclays concedes that while a reduction in Berkshire’s deferred tax liability would be a non-cash item, it notes that as of 3Q 17 Berkshire had $109bn of cash and equivalents, of which the bank views approximately $90bn as being immediately deployable for acquisitions not including potential additional debt capacity.
If Berkshire is able to acquire a large business in an all-cash deal, we would typically expect a transaction to be immediately accretive to Berkshire’s EPS.
In other words, look for Berkshire to aggressively start purchasing companies in the coming months.
Furthermore, Barclays expect the company’s operating earning power – the money made by subsidiaries such as Burlington Northern and Geico -to rise by around 12% in 2018 and beyond as a result of a reduced corporate US tax rate.
Barclays also points out that as of YE16, Berkshire also had around $12bn of undistributed earnings of its foreign subsidiaries. And while the company would need to maintain some of this cash to support its business, “Berkshire could repatriate a portion of it for deployment in acquisitions and/or new investments.” Who knows, we could see even see Berkshire buying back its own stock some time in the not too distant future…
Finally, as Bloomberg notes, Berkshire has long been seen as a major beneficiary of a lower U.S. corporate tax rate, helping to drive the company’s Class A shares up 22% last year. They closed above $300,000 for the first time on Jan. …read more