Buffett Wins Again: Berkshire To Get $29 Billion Boost Under Trump Tax Plan

Something curious happened as Trump was "draining the swamp" - the man who by some accounts owns the swamp, Hillary Clinton's billionaire backer Warren Buffett, may be about to get some $29 billion richer, if only on paper, thanks to Trump's tax-rate cut policies which would boost the book value of Berkshire by as much as $29 billion.

According to an analysis by Barclays, Berkshire may soon enjoy a $29 billion boost to its book value under Trump's proposed tax reform. “We would view this magnitude of increase as favorable for Berkshire shares since it is generally valued on price to book value,” Barclays analysts led by Jay Gelb said in a note to investors Monday first reported by Bloomberg. Berkshire’s book value was more than $270 billion as of Sept. 30; it would surpass $300 billion should Trump's proposal for a 15% corporate tax rate be enacted.

Joining in the overall market frenzy, Berkshire has jumped about 8% in New York trading since Trump won the November 8 election, helped by the increasing value of Buffett’sholdings in bank stocks as interest rates climbed, however it appears the prospect of sharply lower taxes has helped.

Gelb’s analyzed Berkshire's deferred tax liability of about $50 billion at the end of 2015, a figure that includes potential costs if Buffett sells investments that gained in value. The review doesn’t take into account the DTLs at some energy operations, where benefits wold be enjoyed by utility customers and not Berkshire shareholders. The value of the liability is based on the current 35 percent tax rate and would fall by about $22 billion at a 20 percent corporate tax rate and drop by $29 billion at 15 percent, Gelb wrote. Trump has called for cutting the business tax rate to 15 percent, while the House Republican “blueprint” for tax changes proposes 20 percent.

Some more details from the note:

Berkshire Hathaway’s book value could boosted by $29bn (11% increase) if the US corporate tax rate is reduced to 15% due to a decline in its deferred tax liability (our detailed analysis is on page 2). We would view this magnitude of increase as favorable for BRK shares since it is generally valued based on price-to-book value.

 

 

As of year-end 2015, Berkshire had a $63bn net deferred tax liability resulting largely from its unrealized appreciation on investments as well as depreciation and amortization on property, plant and equipment from is Burlington Northern and other capital-intensive businesses. We adjust this $63bn deferred tax liability to exclude $13bn from the Berkshire Hathaway Energy (BHE) business which is mostly regulated utilities. This is because the benefit of these reduced deferred tax liabilities would be expected to accrue to the benefit of the utilities’ customers rather than Berkshire.

 

Although a reduction in a deferred tax liability would not be a non-cash item, the company currently has $85bn of cash of which at least $60bn is viewed as being deployable for acquisitions.

 

As of YE15, Berkshire also had $10.4bn of undistributed earnings of its foreign subsidiaries. The company would need to maintain some of this cash to support its business. However, our sense is Berkshire would likely repatriate a portion of it if there were a low one-time tax on repatriated cash.

The full sensitivity analysis showing Berkshire's benefit from dropping tax rates is shown below:

As Bloomberg also notes Buffett - like Trump and all other wealthy individuals - has long pursued strategies to limit tax payments made by Berkshire. Still, the billionaire supported Democrat Hillary Clinton in the presidential race, and has dismissed the idea that higher rates would discourage investment. He told shareholders in 2013 that when U.S. businesses say corporate taxes are too high, “I would have you take that with a grain of salt.”

The billionaire said at Omaha, Nebraska-based Berkshire’s most recent annual meeting that his company would thrive no matter who won the election. “Berkshire will continue to do fine,” he said at the April gathering. It now appears that he will do even better under a Trump administration.