Just ahead of its Q4 earning report excepted on February 24, lets look at the ever-increasing cash pile and investment activities of Berkshire Hathaway and what does it translate into. Berkshire Hathaway Inc.’s cash pile which is bolstered both by elevated interest rates and a dearth of meaningful deals and where billionaire investor Warren Buffett could put his money to work.
Warren Buffett, CEO of Berkshire Hathaway, has built up a staggering cash reserve, surpassing $157 billion, rivaling tech titan Apple. This cash hoard, a hallmark of Buffett’s strategy, has ballooned due to rising interest rates and scarce investment opportunities.
Berkshire Hathaway’s investments
Despite the cash pile, Buffett’s investment acumen remains undiminished. Recent investments include Occidental Petroleum Corp. shares and an $11.6 billion deal for Alleghany Corp. Berkshire’s cash accumulation stems from various sources, including profitable core businesses and asset sales.
Berkshire’s huge cash hoard
Warren Buffett’s company may be sitting on a record amount of cash, but that doesn’t necessarily mean the famed investor thinks the stock market is overvalued. Some financial advisers are asserting that the conglomerate’s huge cash hoard more than $150 billion in cash and short-term investments, largest ever in the company’s near-60-year history indicates that Buffett is finding it harder than ever to find undervalued companies to acquire. If so, that in turn would imply that the stock market is dangerously overvalued.
Berkshire Hathaway’s challenges
Despite ramping up Berkshire’s acquisition machine in recent years, the company has still struggled to find many of the big-ticket deals that galvanized Buffett’s renown, leaving him with more cash than he and his investing deputies could quickly deploy. After hanging back during the pandemic, he’s since snapped up shares in Occidental Petroleum Corp. and struck a $11.6 billion deal to buy Alleghany Corp. Buffett has also leaned heavily on share repurchases amid the dearth of appealing alternatives, saying the measures benefit shareholders.
The Ever Growing Cash Pile
Berkshire’s cash reserves have steadily grown over the last decade under Buffett’s stewardship. A majority of this cash sits in short-term Treasury bills for safety and liquidity. Berkshire’s cash stash far exceeds what is held by most insurance companies. While critics argue that the cash pile is a challenge Buffett does not believe it. Buffet views it as a wise, strategic decision aligned with his long-term philosophy.
What contributes to Berkshire Hathaway’s cash pile?
Several factors contribute to the accumulation of cash
- Berkshire’s core insurance businesses generate consistent underwriting profits. The premiums collected upfront create a “float” that Buffett can invest.
- Berkshire’s operating subsidiaries including railroads, utilities and manufacturers have been performing well and churning out profits. Excess returns are frequently kept as cash.
- Buffett follows a strict price discipline and has not found sufficiently attractable acquisition targets or stock investments, leading to a pile up of cash.
- Berkshire sold some appreciated stock investments over the years, including Procter & Gamble, which added to cash.
- Berkshire raised debt through bond offerings to increase its financial flexibility.
Berkshire’s varied investments
Berkshire Hathaway owns businesses in insurance, rail transportation, energy generation and distribution, manufacturing, and retailing.
The company is also a large stakeholder in many prominent companies in the U.S., such as American Express and Coca-Cola.
Berkshire Hathaway’s weaknesses
Despite its diversified portfolio, Berkshire Hathaway weakness is its reliance on its insurance segment for revenue generation. Any significant downturn in the insurance sector could adversely impact the company’s overall financial performance.6 Nov 2023
Berkshire Hathaway’s investment philosophy
Berkshire Hathaway’s investment strategy focuses on long-term investments rather than short-term gains. The company believes in investing in high-quality companies that have a competitive advantage, strong management teams, and a sustainable business model. This philosophy has allowed Berkshire Hathaway to achieve consistent growth over the years.
Buffet’s investment evolution
Despite the throughline of value investing, Warren Buffett’s investment strategy has changed over his career. In the beginning of his career, Warren Buffett’s investment strategy entailed finding companies that were down on their luck but still had a few puffs of value left. Over time, shifted towards finding great companies at a fair price. Today, Buffett continues to apply this “great company at a fair price” approach to his investments, focusing on companies with strong growth potential and a durable competitive advantage.
He has expanded his gaze to invest in certain technology companies, showing that he can continue to learn.
His ideal holding period is “forever” and Berkshire has held stakes in companies like Coca-Cola and American Express for decades.
Buffett also prefers to invest in companies with durable competitive advantages, or “economic moats”, that allow them to withstand competition and generate consistent profits.
Berkshire Hathaway’s stock buyback
Despite ramping up Berkshire’s acquisition machine in recent years, the company has still struggled to find many of the big-ticket deals that galvanized Buffett’s renown, leaving him with more cash than he could quickly deploy. After hanging back during the pandemic, he’s since snapped up shares in Occidental Petroleum Corp. and struck a $11.6 billion deal to buy Alleghany Corp. Buffett has also leaned heavily on share repurchases amid the dearth of appealing alternatives, saying the measures benefit shareholders.
Buffett spent about $7.0 billion repurchasing Berkshire stock in the first nine months of 2023. This is an indication that Warren Buffet believes the shares are undervalued and continuing shareholders will benefit from the stock buybacks.
Berkshire’s benefits from cash pile
Berkshire Hathaway is positioned well to take advantage of a market downturn with its large cash pile and Warren Buffett’s investment skills.
- Buffett prefers to not hold more than 20% of Berkshire’s value in cash and looks for undervalued businesses to invest in.
- Holding cash makes sense when businesses are too expensive, but investors need to determine their own cash management strategy based on their investment style and goals.
When it comes to Berkshire’s cash strategy, the company will always hold some extra cash so it can cover unexpected catastrophic insurance claims.
Other cash rich companies
Other cash-rich companies are. Google parent Alphabet (GOOGL) had $119 billion of cash, equivalents, and marketable securities and $53 billion of that total consisted of government bonds. Apple (AAPL) had $207 billion of cash and marketable securities and about $28 billion of that amount was in Treasury securities.
Berkshire’s Q4 earning report
Berkshire’s operating earnings are expected to have risen 26% in the fourth quarter to $5,717 per Class A share, according to FactSet. Overall earnings likely will be much higher due to the stock market rally and a surge in Apple shares in the fourth quarter. Berkshire’s fourth quarter earnings will likely be released at the end of February along with Buffett’s annual letter to shareholders.
Looking ahead, Berkshire’s cash reserves position it advantageously for market downturns, showcasing Buffett’s resilience and adaptability. Warren Buffett has doubled the annual returns of the S&P 500 with most great buys and some mistakes like Kraft Heinz. Part of Buffett’s strategy was to hold some cash for long periods of time, waiting for those good investments to come along.
