Western Railroad Discussion > BNSF Is a Cash Machine

Buffett Said He Paid a Lot. $15 Billion Later, BNSF Is a Cash Machine.
Business Week
by Noah Buhayar
November 10, 2014

> Days after Warren Buffett announced his $26.5 billion buyout of
> railroad BNSF, he insisted that he’d paid a steep price to own a
> business that would benefit his company, Berkshire Hathaway Inc.
> over the next century.
>
> “You don’t get bargains on things like that,” he said in a November
> 2009 interview with Charlie Rose that aired on PBS. “It’s not
> cheap.”
>
> Five years later, that assessment rings a bit hollow. Buoyed by an
> onshore oil boom, BNSF has become a cash machine for Buffett. The
> railroad had sent more than $15 billion in dividends to Berkshire
> through Sept. 30, according to quarterly regulatory filings, the
> latest of which was released last week. More stunning: The business
> is on pace to return all the cash Buffett spent taking it private by
> the end of this year.
>
> Annual revenue at the railroad has risen 57 percent, and earnings
> more than doubled to $3.8 billion since Buffett bought it. Sales have
> climbed even as BNSF faced increased public scrutiny over service
> delays and safety.
>
> “He stole it,” said Jeff Matthews, a Berkshire shareholder and author
> of books about the company. “He’s got to feel really good that he
> bought it when he did, because it’s a wonderful asset, and it’s done
> nothing but get more valuable in the time that he’s owned it.”

Full story:

BNSF is a Cash Machine

Great news!

Bill Deaver
Tehachapi, CA

I'm quite sure UP and NS have the same windfall. The current drop in oil prices is a plus for all the Railroads.

Jim

I'd say Mr. B should be playing the Las Vegas slots, but he is having more fun! === === = === JLH

Doubt he would have the same odds of winning in Vegas....

highgreengraphics Wrote:
-------------------------------------------------------
> I'd say Mr. B should be playing the Las Vegas
> slots, but he is having more fun! === === = ===
> JLH

Anyone want to float me a loan for 30 billion or so. Id like to buy one of the other Class ones.

Kind of surprised there hasn't been another railroad taken private. It is one heck of a return if you can put the kind of money down.

Posted from iPhone

He owns the 2nd biggest train set in the world. In i bought shares n BERKSHIRE-HATHAWAY B STOCK. I feel so smart now.

Instead of paying Berkshire Hathaway dividends they don't need in the short run, BNSF could have double-tracked the High Line with that money.

Instead of an "all in" bet on the American economy in the long run as he touted, Buffett's BNSF investment has morphed into a take-the-money-and-run affair that skimps on the investment needed to realize that bet on the future American economy.

The "cash machine" is capacity-limited right now. It could be generating a lot more cash if the capacity investments proposed and planned long ago had been made.

Best regards,

Rob L.

I'm not sure that BNSF could invest more than they are now spending on capacity improvements, that is, they don't have the people and the abilities to do much more than they are now doing. I think it is remarkable that all the railroads have morphed in twenty years from surviving thru shrinkage into growing and prospering.

TIOGA PASS

Norman Orfall
Helendale, CA
TIOGA PASS, a private railcar

Not to start anything, but Berkshire Hathaway dosen't pay dividends.

SOU3921 Wrote:
-------------------------------------------------------
> Not to start anything, but Berkshire Hathaway
> dosen't pay dividends.

Correct. However, the subsidiary companies like MidAmerican, BNSF, GEICO, etc pay dividends up to Berkshire Hathaway. BRK then decides where to invest that money for the upcoming year.


WONK ALERT

The US tax code allows double taxation of corporate dividends paid to individual shareholders. So, if a company earns a buck, it pays 20 cents to 35 cents in taxes to the feds, and more to states. Of the remaining 80 cents to 65 cents which could be paid to individuals, the share owners pay another 15 to 20 cents in various capital gains and Obamacare taxes. So, of the buck earned by the company, its owners only get 50 to 65 cents in income after taxes.

in contrast, because Berkshire owns BNSF, it can receive dividends from its subsidiary, and file just one set of taxes. And exclude the dividends received from BNSF as a separate taxable item, as it pays taxes on the overall Berkshire earnings including the dividends. So, it only pays one set of taxes at the corporate level.

THIS IS A HIGHLY SIMPLIFIED EXPLANATION. if anybody wants to argue the debt financed dividends inclusion, send me a PM.

aronco Wrote:
-------------------------------------------------------
> I'm not sure that BNSF could invest more than they
> are now spending on capacity improvements, that
> is, they don't have the people and the abilities
> to do much more than they are now doing.

Nowadays this stuff is done by contractors, so I think the limited in-house staff argument is irrelevant. However, competent contractors might be in short supply these days, that I don't know.

> I think
> it is remarkable that all the railroads have
> morphed in twenty years from surviving thru
> shrinkage into growing and prospering.
>

The ball game changed completely in 1985 with full implementation of de-regulation. It took the industry about 15 years to realize they could actually do a different business model and actually make lots, lots of money. (As an aside, I think the fact that it took the industry 15 years to realize that is a disgrace.) There are still way, way too many industry managers who think in terms of downsizing and cost-cutting as the primary means to make money. (That attitude is left over from the days of regulation, when pricing and contracting were not buttons management could push.)

A much better way to make money is by getting paid a lot of money.

Best regards,

Rob L.

Cash flow from operations 3rd qtr 2014, in millions. Source yahoo finance

UNP 2,137
CSX 857
NSC 909

They are all doing well. Positive cash flow is the mother of business.

cjvrr Wrote:
-------------------------------------------------------
> Doubt he would have the same odds of winning in
> Vegas....
>
> highgreengraphics Wrote:
> --------------------------------------------------
> -----
> > I'd say Mr. B should be playing the Las Vegas
> > slots, but he is having more fun! === === = ===
> > JLH


For Buffett, better to own the casino than waste time in the gaming rooms trying to break the bank.

billio Wrote:
-------------------------------------------------------
> cjvrr Wrote:
> --------------------------------------------------
> -----
> > Doubt he would have the same odds of winning in
> > Vegas....
> >
> > highgreengraphics Wrote:
> >
> --------------------------------------------------
>
> > -----
> > > I'd say Mr. B should be playing the Las Vegas
> > > slots, but he is having more fun! === === =
> ===
> > > JLH
>
>
> For Buffett, better to own the casino than waste
> time in the gaming rooms trying to break the bank.

Well, it would be a classic case of the old adage, "How to leave Las Vegas with a small fortune: go there with a large one."

Tor in Eugene

rob_l Wrote:
-------------------------------------------------------
> aronco Wrote:
> --------------------------------------------------
> -----
> > I'm not sure that BNSF could invest more than
> they
> > are now spending on capacity improvements, that
> > is, they don't have the people and the
> abilities
> > to do much more than they are now doing.
>
> Nowadays this stuff is done by contractors, so I
> think the limited in-house staff argument is
> irrelevant. However, competent contractors might
> be in short supply these days, that I don't know.
>
> > I think
> > it is remarkable that all the railroads have
> > morphed in twenty years from surviving thru
> > shrinkage into growing and prospering.
> >
>
> The ball game changed completely in 1985 with full
> implementation of de-regulation. It took the
> industry about 15 years to realize they could
> actually do a different business model and
> actually make lots, lots of money. (As an aside, I
> think the fact that it took the industry 15 years
> to realize that is a disgrace.) There are still
> way, way too many industry managers who think in
> terms of downsizing and cost-cutting as the
> primary means to make money. (That attitude is
> left over from the days of regulation, when
> pricing and contracting were not buttons
> management could push.)
>
> A much better way to make money is by getting paid
> a lot of money.
>
> Best regards,
>
> Rob L.

While I would agree with rob that it took fifteen years for
the railroads to figure out the landscape had changed is a
disgrace, and that there is still an attitude of downsizing
and cost cutting in rail management, I think the rest of his
assertions on the BNSF are facile and trite. We need to
remember that all capital stock companies need to find a way
to reimburse their stockholders in some manner. Without the
investors, there is no company.

Perhaps to illustrate this, we can look at the current situation
in the National Basketball Association. The players association
counsel has suggested that without the players, the owners would
not be raking in the cash they're getting. What she overlooked
is that without the owners, there would be no NBA. So, while we
can lament and decry the fact that companies paid dividends to
their stockholders, that's the price of being a capital stock
company.

Yes, we can decry individual decisions, but overall, the results seem to be
there, and in the end, that's all that counts.

Nick Tharalson,
Marion, IA

ntharalson Wrote:
-------------------------------------------------------
>
> While I would agree with rob that it took fifteen
> years for
> the railroads to figure out the landscape had
> changed is a
> disgrace, and that there is still an attitude of
> downsizing
> and cost cutting in rail management, I think the
> rest of his
> assertions on the BNSF are facile and trite.

"Facile and trite." How kind.

> We need to
> remember that all capital stock companies need to
> find a way
> to reimburse their stockholders in some manner.
> Without the
> investors, there is no company.

Perhaps I am old-school, but my understanding is that the best thing management can do is to maximize value for the stockholders. If management runs out of potential investments that pay higher returns than the stockholders can earn elsewhere, then the un-invested funds should be returned to the shareholders as dividends so they can invest them elsewhere. But if management still has potential investments with high rates of return, then I submit that management is acting in the shareholders' best interests if it invests the funds in those projects rather than returning the funds as dividends.

I submit that is the case at BNSF.

The one area of the economy where inflation has been and continues to be insane is construction. (Fortunately, price stability in areas like food and consumer goods have offset this.) Costs of constructing new infrastructure will only get higher. A lot higher. I don't think shelling out $15 billion in dividends and reliance on future earnings to fund future construction of infrastructure was the best business management choice.

>
> Yes, we can decry individual decisions, but
> overall, the results seem to be
> there, and in the end, that's all that counts.
>

I submit that credit should only be given where credit is due. I like the old Smith-Barney ad: "We make money the old-fashioned way. We earn it."

Best regards,

Rob L.

rantoul Wrote:
-------------------------------------------------------
> Or,
>
> ...I submit that credit should only be given where
> credit is due. I like the old boy's network: "We
> make money the old-fashioned way. We get it from
> the government."...
>
> CREATE (Chicago), Tower 55 (Ft. Worth), Colton
> (California),....
>
> Web site devoted to the railroad industry trough
> http://www.dot.gov/railroads

Yup. The rate of return from exploiting free government money can be exceptionally high. But it's not so old-fashioned. Relatively recent, actually. Started with the 3-R Act.

Best regards,

Rob L.

The sticking point is always "how much taxpayer money do you want deployed in an investment that benefits only one company?"

Virginia offered Norfolk Southern funding to expand the Hagerstown to Bristol line and pull trailers off I-81. A modest investment would save the state bundles in highway costs. But NS balked at conditions they viewed as "open access" for major shippers, and turned down the funding.

Goldman Sachs, Bank of America, General Motors, etc have done fine with TARP and government investment. Having 0% interest on free money is a great deal.

Maybe we need to remember some things here. Five years ago, no one saw
the Bakken(sp) oil boom coming. Suddenly, BNSF has the Powder River Basin
all over again with intermodal and passengers in the mix ramping up at
twice the speed. That they've been able to handle this as well as they
have, and I'll concede it hasn't been great, is something of a miracle.
However, they have recognized their deficiencies and are moving to correct
them. As is the CP. They deserve some credit for that.

It is not old school to maximize value for the stockholders. It is, however,
short-sighted not to recognize success at doing that.

Nick Tharalson,
Marion, IA