After Warren Buffett’s Berkshire Hathaway concludes his deal to buy up BNSF Railway, the investor says he will expect a “reasonable return” on any added capital investment he puts into the railroad “but we’re not entitled to spectacular returns.”
Buffett made the remarks in a television interview for The Charlie Rose Show that was broadcast Nov. 13. BNSF has since filed an excerpt of the remarks to the Securities and Exchange Commission.
The issue of how much return railroads should make is a contentious one, with shippers saying the few major railroads operate as near monopolies in their regions and use non-competitive routes and favorable regulation to boost their pricing power.
Railroads say they must make a good enough return to woo equity as well as debt-instrument investors, and to cover their hefty spending on infrastructure improvements, to make sure they avoid the financial problems that preceded their deregulation in 1980.
With its $26 billion buyout of remaining BNSF shares, a deal expected to close in the first quarter, Berkshire is getting a unionized, regulated and capital-intensive business, all of which can add to costs. But Buffett told Rose that rail service is a long-lasting type of business that is important to the national economy.
“I felt it was an opportunity to buy a business that is going to be around for 100 or 200 years, that’s interwoven with the American economy in a way that if the American economy prospers, the business will prosper,” Buffett said. “It is the most efficient way of moving goods in the country. It is the most environmentally friendly way of moving goods, and both those things are going to be very important.”
He also said shipping freight by rail is “far, far more attractive in terms of global warming than using trucks, for example. So it will be here, and if we get a reasonable return on the added capital investment -- because it will take added capital investment -- we’ll do OK.”
Buffett said a “reasonable return is good enough.” Berkshire also has some electric utility investment, he said, “and it’s the same thing there. When we build electric generation or something of the sort, we shouldn’t expect a spectacular return.”
Such companies, he said, are “building things that are essential to society, and people need our services. They really don’t have any choice in the case of the electric utilities, for example, and sometimes in case of rail. And we should get a decent return on that. Enough to encourage us to keep putting money into the business, but we’re not entitled to spectacular returns. “
See also “Buffett Sells Non-BNSF Rail Holdings”
To see the SEC filing, click here .
Contact John D. Boyd at email@example.com.