In Berkshire’s 2021 annual report, it reported owning 19.9% of American Express, up from 18.8% in the 2020 annual report. The share count remained unchanged at 151,610,700 (the same as it has been for more than 2 decades), so the increase in ownership stake is the result of share repurchases by American Express.
American Express has continued to repurchase shares through the first half of 2022, and according to its latest 10-Q, there were 749,747,789 outstanding shares as of July 18. Assuming Berkshire has not sold any shares (which seems like a very safe assumption considering the history), its ownership stake is now approximately 20.2%, and thus has crossed the presumed threshold for the equity method of accounting.
If Berkshire begins using the equity method to account for its investment in American Express, would that have any true financial impact on Berkshire? Or does the method of accounting merely change where/how things shows up? Perhaps another way to phrase my questions is: Does Berkshire receive any tangible financial benefits by owning more than 20% of another corporation (as opposed to 19.9%)?
My curiosity also applies to Occidental, since Berkshire’s ownership is almost 20% and seems likely to reach 20% in the near future (due to either additional share purchases by Berkshire or repurchases by Occidental).
Thanks in advance for any information.
The big good thing at 20% is the reduced dividend tax : )
Based on what little I’ve read, the threshold for the equity method of accounting isn’t a bright line in the same way.
The test is, if I’m not mistaken, that the investor has “the ability to exercise significant influence over the investee’s operating and financial policies”.
Some of the tests:
Representation on the board of directors
Participation in policy-making processes
Material intra-entity transactions
Interchange of managerial personnel
Extent of ownership by an investor in relation to the concentration of other shareholdings
So, I think that can be anywhere from less than 20% to 50% depending on the nature of the corporate relationship.
IIRC, Berkshire has declared to the SEC that they have a 100% purely passive interest in Amex.
I’m not sure if that will stick–I’m no expert.
I think Amex is, for regulatory purposes, a bank, right?
The equity method is so bizarre I still can’t wrap my head around it. Bits of it seem counter intuitive.
Each time we get a dividend from KHC, the carrying value is reduced, right? Book value falls at that line, and rises in the cash line.
agreements like the one linked here and earlier agreements/amendments mentioned between Berkshire and AXP and Berkshire and the Federal Reserve are probably enough to ensure Berkshire is not forced to use the equity method on AXP -