Why Warren Buffett puts BNSF ownership on par with Berkshire Hathaway's Apple stock

Fort Worth-based BNSF Railway took up a good amount of space in Warren Buffett’s annual letter to Berkshire Hathaway shareholders.

After starting his letter by describing property and casualty insurance as the core of Berkshire’s business, Buffett wasted no time getting to the railroad.

“Our second and third most valuable assets – it’s pretty much a toss-up at this point – are Berkshire’s 100% ownership of BNSF, America’s largest railroad measured by freight volume, and our 5.4% ownership of Apple,” said Buffett, who regularly praises BNSF leaders in the letter that goes out as part of Berkshire Hathway’s closely watched annual meeting.

Buffett then described the company’s 91% ownership of Berkshire Hathaway Energy as its fourth-best asset. “What we have here is a very unusual utility business, whose annual earnings have grown from £122 million to £3.4 billion during our 21 years of ownership,” he said.

Later, Buffett told shareholders that Berkshire is the nation’s top owner of property, plants and equipment with assets totaling £154 billion. BNSF and BHE, the company’s energy unit, account for a significant portion of those property holdings.

“Asset-heavy companies, however, can be good investments,” he said. “Indeed, we are delighted with our two giants – BNSF and BHE: In 2011, Berkshire’s first full year of BNSF ownership, the two companies had combined earnings of £4.2 billion. In 2020, a tough year for many businesses, the pair earned £8.3 billion.’ ”

He acknowledged that BNSF and the energy company will require major capital expenditures for decades to come.

“The good news is that both are likely to deliver appropriate returns on the incremental investment.

Let’s look first at BNSF. Your railroad carries about 15% of all non-local ton-miles (a ton of freight moved one mile) of goods that move in the United States, whether by rail, truck, pipeline, barge or aircraft. By a significant margin, BNSF’s loads top those of any other carrier,” he wrote.

BNSF CEO Katie Farmer(BNSF)

Berkshire has invested £41 billion in fixed railroad assets since acquiring BNSF in 2010 for £44 billion.

“Railroading is an outdoor sport, featuring mile-long trains obliged to reliably operate in both extreme cold and heat, as they all the while encounter every form of terrain from deserts to mountains,” Buffett told shareholders. “BNSF owns 23,000 miles of track, spread throughout 28 states, and must spend whatever it takes to maximize safety and service throughout its vast system.”

Buffett also praised BNSF for its ability to deliver substantial dividends to Berkshire shareholders- £41.8 billion in total.

“The railroad pays us, however, only what remains after it both fulfills the needs of its business and maintains a cash balance of about £2 billion,” he said. “This conservative policy allows BNSF to borrow at low rates, independent of any guarantee of its debt by Berkshire. ”

He credited retired CEO Carl Ice and new CEO Katie Farmer with boosting BNSF’s profit margin by 2.9 percentage points in a pandemic-challenged year that saw the volume of goods carried decline 7%.

“Your railroad is in good hands,” he said.

Read Buffett’s full letter here.

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