Warren Buffett hasn't seen a lot to like in the stock market recently. He's sold more stock than he bought for Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) equity portfolio in each of the last seven quarters. But last quarter Buffett made his biggest stock sale in the history of the company.
Berkshire unloaded 389,368,450 shares of Apple (NASDAQ: AAPL). Those shares are valued around $88 billion at the time of this writing. Berkshire received less for the shares as Apple traded below its current level throughout the second quarter.
That makes the third straight quarter Buffett sold shares of Apple, but last quarter's sale was by far the largest. He sold 10 million shares in the fourth quarter followed by 116 million shares in the first quarter, and the 389 million in the second quarter.
At Berkshire's most recent shareholder meeting, Buffett said the sales of highly appreciated assets like its Apple investment take advantage of the current tax code. Still, the tax bill will be quite hefty for Berkshire this year.
Apple shares traded between $165 and $216 during the second quarter. The average closing share price during the period was $186.49. If we assume Buffett received the average share price on the sale, just so we can do some that, that would be proceeds of $72.6 billion.
Berkshire accumulated the bulk of its Apple position between 2016 and 2018, paying an estimated $36.51 per share on a split-adjusted basis. If every single share sold last quarter came from that lot of purchases and sold at the Q2 average, Berkshire Hathaway would have produced a gain around $150 per share for the 389 million shares sold. That's a $58.4 billion gain.
Berkshire also sold a big chunk of Apple shares in the first quarter, when the stock traded for an average price of $181.83. The estimated gain on that sale is $16.9 billion. That would be a total gain of $75 billion on Apple stock sales alone, and we're only halfway through the year.
Using these calculations, at the current federal corporate tax rate of 21%, Berkshire would have to pay Uncle Sam about $15.8 billion out of the proceeds from the stock sale. Nebraska currently charges a corporate tax rate of 6.5%, so Berkshire will have to pay its state government an additional $4.9 billion.
That said, the current tax code saved Berkshire shareholders a lot of money compared to several years ago. The 2017 tax cuts lowered the corporate tax rate from 35% to 21%. Under the old law, Buffett's sale would've cost an additional $10.5 billion. President Joe Biden has proposed a 28% corporate tax rate to go into effect when the 2017 tax cuts expire after next year.
How will a massive tax bill impact Berkshire shareholders?
Berkshire Hathaway shareholders may be wondering how this tax expense will impact the company's earnings. The good news for investors is that Berkshire accounts for its tax liability on unrealized capital gains each quarter as a deferred tax expense. In other words, the bulk of the tax on Apple's gains has probably already been accounted for during previous quarters' earnings reports. That's why investors didn't see a sudden surge in tax expenses on Berkshire's second-quarter report.
As a result, earnings won't be affected by the stock sale (other than the missed earnings from any continued rise of Apple's shares). That said, the sale will result in a real cash expenditure, which management warns will impact cash flows. "Operating cash flows over the remainder of 2024 will be reduced by significant income tax payments derived from taxable gains on disposals of equity securities," management wrote in its second-quarter earnings release.
Despite the hefty tax bill, Berkshire has more than enough cash on hand to pay the government. As of the end of June, it held $277 billion in cash and short-term Treasury bills. A measly $20.7 billion in taxes won't change the fact that Buffett has more cash than he has good investment options for Berkshire.
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Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett Just Made His Biggest Stock Sale Ever. Here's What the Tax Bill Could Be. was originally published by The Motley Fool