I’ve been spending a lot of time studying Berkshire Hathaway’s float with the aim of deconstructing its capital structure. As I read and re-read Warren Buffett’s annual letters his true genius continues to fascinate me.
While many readers will know Berkshire is re-known for its insurance float, it will soon be surpassed by its deferred tax float. While one form of this float is unrealised capital gains, the more material source is being generated by depreciation related deferred tax liabilities from the capital intensive businesses such as BNSF (rail-road) and MidAmerican (Utilities). As such, these infrastructure acquisitions were just as much about generating new sources of float as they were about buying ‘great businesses’ – the two ideas go hand in glove.
Float growth is a key driver of intrinsic value for Berkshire, however, now that insurance float is maturing, Buffett needs new and innovative ways to grow it. Railroad assets like BNSF have useful lives of 100 years and will generate deferred tax liabilities for decades after Buffett’s succession – the tax man ‘Uncle Sam’ is a key player of Berkshire’s future…
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This research is a complimentary addition to the work on Floats and Moats by The Fundoo Professor