Warren Buffett roots for retained earnings, rues Apple share sale

Ace investor and billionaire Warren Buffett has batted for the importance of retained earnings at a time when more and more investors are pitching for increased capital allocation towards the shareholders.

The investment maestro highlighted the above point in a letter to the shareholders of Berkshire Hathaway Inc (NYSE: BRK.A), which also saw him ruing over a mistake he made regarding the sale of Apple shares.

 “We don’t control the operations of those companies, but we do share proportionately in their long-term prosperity. From an accounting standpoint, however, our portion of their earnings is not included in Berkshire’s income. Instead, only what these investees pay us in dividends is recorded on our books,” he said in the letter.

He argued since the investee companies plough these earnings for the business expansion, hence it would lead to the better earnings for the Berkshire Hathaway in the future.

However, he also cautioned the retail shareholders by stating that the reinvestments from retained earnings cannot be foolproof and that some of its investees “will disappoint, adding little, if anything, to the value of their company by retaining earnings”.

In another major highlight of the letter, the famed investor said that selling Apple Inc (NASDAQ:AAPL) shares in 2019 was a big error for the company. "I sold some stock last year, although our shareholders still saw their shares go up because we repurchased shares. But that was probably a mistake," he told the shareholders. As Apple has been reporting bumper sales of its iPhone, the shares of the company have risen by 19% in the past six months.

Also Read: Big Tech gets bigger in March quarter

Despite selling about US$11 billion worth of Apple’s shares in the December 2020 quarter, Berkshire’s holdings in the iPhone-maker still stand just shy of US$120 billion. Apple is the largest investee company in Berkshire’s portfolio – as the latter makes for almost 5.4% in Apple’s shareholdings.

Interestingly, Berkshire’s Class A shares are the costliest shares in the world – worth US$412,500 as on date.