Warren Buffett's Berkshire Gains $37 Billion from Tax Cuts

Warren Buffett's conglomerate Berkshire Hathaway Inc. (BRK.A) is likely to see major benefits as a result of the recent changes to U.S. tax law, according to a recent report by Bloomberg. (See also: Trump's Tax Reform Plan.)

The billionaire could see his company make incredible strides in book value. In fact, a recent note from analysts at Barclays Plc suggests that Berkshire Hathaway's measure of assets minus liabilities likely increased by $37 billion in the last quarter of 2017.

Lowering of Tax Liability on Appreciated Investments

The dramatic increase in book value, constituting a change of about 12%, is a result of Berkshire Hathaway lowering its tax liability on appreciated investments. Thanks to the recent tax cut, the company's operating earnings power (that is, the money that it makes through each of its many subsidiaries) may increase by 12% on an ongoing basis. Tellingly, Barclays' estimate is more conservative than some; Morgan Stanley analysts predicted the increase would be 14%.

Corporate Tax Rate Changes Benefit Major Companies

Bloomberg points out that "Berkshire has long been seen as a major beneficiary of a lower U.S. corporate tax rate," acknowledging that favorable tax conditions have aided the company's Class A shares in increasing in value by nearly one-quarter over the past year alone.

Berkshire Hathaway stock achieved a major milestone early in the new year as well, as they closed above $300,000 per share for the first time in history on January 4th.

The prediction from Barclays analysts at this time also outstrips a previous prediction made by the same firm in September 2017. At that time, analysts suggested the company stood to gain as much as $27 billion in book value from the proposed tax cuts. The fact that the conglomerate earns most of its money in the United States, where it has been subjected to a 35% tax rate, means that the reduced rate will have a disproportionately large impact. The new law, passed last month, reduces that rate to 21%.

One of the primary reasons for the increase in value is the fact that Berkshire will now be able to lower its tax bill for investments which have gained in value. The tax changes are not likely to make an immediate impact on the Nebraska company's $109 billion in cash and equivalents, but it does mean that large, all-cash acquisitions are likely to bolster the company's earnings per share.

Berkshire has long been seen as one of the most successful companies in history. From the time Warren Buffett took control of the company in 1965 through 2016, Berkshire saw its book value per share grow at an annualized rate of 19%. This is compared with a 9.7% annualized rate for the S&P 500 for the same period. (See also: Warren Buffett's Investing Style Reviewed.)

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