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Berkshire Hathaway’s Stake in American Express Is Poised to Hit 20%. That Could Trigger an Accounting Change and Boost Berkshire’s Earnings.

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Berkshire Hathaway CEO Warren Buffett

Paul Morigi/Getty Images for Fortune/Time Inc


Berkshire Hathaway

‘s longstanding stake in


American Express

is set to hit the 20% threshold in the coming months. That could prompt an accounting change that would boost Berkshire’s earnings.

 


Berkshire Hathaway

(ticker: BRK.A and BRK.B) holds 151.6 million shares of


American Express

(AXP) worth $29 billion, its third-largest equity investment behind


Apple

(AAPL) and


Bank of America

(BAC).

Berkshire hasn’t bought a share of American Express since the late 1990s, but its percentage ownership has steadily crept up to 19.97%, as of Feb. 3, the date of American Express’s 10-K report, from 11% in 2002, as a result of stock buybacks by the big charge-card company. American Express had 759.4 million shares outstanding on Feb. 3.

 Once its stake reaches 20%, which should happen in April, Berkshire might switch to the equity method of accounting for the American Express stake.

That would boost Berkshire’s annual profits by over $1 billion since it would record 20% of American Express’s earnings, which totaled $8 billion last year.  

Under the current accounting treatment, the company only records American Express’s dividends in its financial results. Berkshire gets about $260 million annually in Amex dividends.

Berkshire did not respond to a request for comment.

Accounting rules normally require a company to use the equity method when it hits 20% because that threshold presumes that the holder can exercise significant influence. Berkshire, however, has taken pains since the mid-1990s to emphasize that its stake in American Express is purely passive.

It received approval from the Federal Reserve in 2017 to lift its stake to 25% solely from the percentage creep from buybacks and not any purchases of American Express stock.

In its 2021 proxy statement, American Express said:

“In 1995, we signed an agreement (as amended from time to time) with Berkshire designed to ensure that Berkshire’s investment in our company will be passive. The agreement remains in effect as long as Berkshire owns 10% or more of our voting securities. Berkshire made similar commitments to the Board of Governors of the Federal Reserve System. Berkshire and its subsidiaries have also agreed to follow our board’s recommendations in voting company common shares they own up to 17% as long as Mr. (Stephen) Squeri is our CEO and Berkshire owns 5% or more of our voting securities.”  

Berkshire CEO Warren Buffett has followed and invested in American Express since the 1960s and has long had a good relationship with former CEO Ken Chenault, who joined Berkshire’s board in 2020 after retiring from American Express.

Federal regulators generally don’t allow investors to own more than 10% of a big financial company, and Berkshire has been capped at that level in some of its bank investments.

In an email to Barron’s, New York accounting expert Robert Willens wrote that while companies normally have to use the equity accounting method when they hit 20%, Berkshire’s agreement with American Express “might be decisive.”

Willens continued: “Although the term, ‘passive,’ is not contained or referred to in the accounting literature, the fact that the (American Express) investment is ‘designed to ensure that Berkshire’s investment…will be passive’ sounds like it might be an effective bar to the use of the equity method.” 

In its 2020 annual report, Berkshire stated: “We utilize the equity method to account for investments when we possess the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted.”

Berkshire uses the equity method for its 26.6% stake in


Kraft Heinz

(KHC) because it is part of a control group with Brazil’s 3G.

Before its purchase of Burlington Northern Santa Fe in 2010, Berkshire accounted for its 20%-plus stake in the railroad under the equity method.

Write to Andrew Bary at andrew.bary@barrons.com

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