Warren Buffett’s Berkshire hit with $3.8 billion Kraft Heinz charge

Warren Buffett’s Berkshire Hathaway Inc. took a $3.8 billion impairment on its Kraft Heinz Co. stake, the latest hit to an investment that’s weighed on the billionaire investor’s company in recent years.

Berkshire marked down its carrying value of the Kraft Heinz stake to $8.4 billion at the end of June, according to a regulatory filing Saturday.

Buffett’s Kraft Heinz stake has been a rare disappointment for the investor. While he’s still in the black on his investment, the stock of the packaged foods giant, which was created in 2015 through the merger of Kraft and Heinz, has fallen 62% since then. During the same period, the S&P 500 has risen 202%.

Kraft Heinz is now contemplating a spinoff of part of its business as it grapples with headwinds including inflation weighing on consumers’ spending and people seeking healthier alternatives to its products. Last month, the company posted a decline in sales that wasn’t as bad as analysts had predicted, in part thanks to higher prices.

Buffett’s company said that the sustained decline in fair value was part of the reason that the firm marked down its stake. But the company said it also considered the fact that Berkshire gave up seats on the firm’s board and Kraft Heinz is eyeing strategic transactions.

“Given these factors, as well as prevailing economic and other uncertainties, we concluded that the unrealized loss, represented by the difference between the carrying value of our investment and its fair value, was other-than-temporary,” Berkshire said in the filing. Buffett’s conglomerate owned 27.4% of Kraft Heinz stock at the end of June.

Buffett’s cash pile ended up dropping 1% in the three months through June, to $344 billion, the first time in three years that the war chest has shrunk. Those funds had previously kept soaring to all-time highs as Buffett struggled to find opportunities to invest.

Buffett ended up taking a more cautious approach to the stock market in the second quarter. He was a net seller of other companies’ stocks during the period, offloading about $3 billion of equities.

He even steered clear of Berkshire’s own shares, forgoing any stock buybacks. He’s been on the sidelines for repurchases for roughly a year now, despite the stock falling 12% after Buffett announced in May that he would step down as chief executive officer at the end of the year.

Operating Profit

Berkshire had a weaker second quarter at its operating businesses. Profit dropped 3.8% to $11.16 billion, driven by a decline in underwriting earnings at its insurers.

Its auto insurer, Geico, posted pretax underwriting earnings that rose 2% to $1.8 billion in the second quarter. The unit’s underwriting expenses surged 40% in the period, as the company spent more to increase its policy count.

At its railroad, BNSF, operating earnings rose 19% to about $1.5 billion, an increase Berkshire attributes to increased productivity and a lower tax rate. The unit, which Berkshire acquired in 2010, has been caught up in dealmaking speculation in recent weeks. Two major competitors, Union Pacific Corp. and Norfolk Southern Corp., struck a $72 billion deal to create the first transcontinental railroad operator.

Berkshire’s utilities business, which runs Pacificorp, MidAmerican and NV Energy, posted a 7% increase in operating earnings. The company said it is currently evaluating the impact of President Donald Trump’s tax bill, as the piece of legislature accelerates the phase-out of clean energy production.