Berkshire Hathaway (BRK.A)(BRK.B) has not beaten the leading market indices over the past decade-long bull market, which has led many investors to ponder if the sprawling conglomerate is still worth more than the sum of its parts.
Warren Buffett (Trades, Portfolio) fans had been holding out hope that market-beating performance would return as soon as it was able to deploy its cash in a crisis scenario. Yet, a crisis scenario has come at last, and Berkshire has yet to make a deal. In my opinion, that may signal uncharted waters for the conglomerate.
A case of too much cash?
Buffett’s affinity for large cash holdings has faced mounting scrutiny for years. Back in 2013, when Berkshire’s cash balance was only about a third of its current size, investors were already questioning the utility of so much cash sitting around and not earning a return. In May of that year, Morningstar’s Gregg Warren suggested that Berkshire’s cash management strategy might not be ideal:
“Is that the right strategy for Berkshire? Is that the right strategy for the shareholders? We've always expected to hear shareholders get a bit more vocal as time goes on, especially with that amount of cash sitting on the books.”
The scrutiny facing Berkshire’s cash balance has only intensified as it has continued to balloon in size. Even bullish investors have been calling for more active deployment of the company’s excess capital. Last summer, Pershing Square Holdings, the hedge fund led by Bill Ackman (Trades, Portfolio), announced a big stake in Berkshire. Among the reasons Ackman cited for the investment was Berkshire’s huge cash pile, which he felt could – and should – be deployed expeditiously:
“If Berkshire can improve its operations and intelligently deploy a substantial portion of its excess capital over time, we estimate that the company’s earnings per share should grow at a mid-teens’ compounded annual rate over the intermediate term.”
The key factor driving interest in Berkshire’s cash balance is its potential to be deployed efficiently. If this is not done, investors could increasingly expect to see alternative methods of returning cash to shareholders, such as buybacks or dividends.
Letting a good crisis go to waste?
Berkshire’s cash balance has been one of its greatest assets. However, it seems that its utility may have been substantially diminished – one might even say undermined – by the federal government’s stance of unlimited monetary aid during the current crisis. Thus, even if Buffett is currently holding his fire because he is waiting for better deals to emerge in the event of another downward market correction, he may still find it tough to strike worthwhile bargains as high-debt companies are rewarded.
Whether Berkshire is still sitting on the sidelines because the federal government is simply offering better bailout terms, Buffett’s potential expectation of another near-term market correction, or perhaps another – as yet unknown – reason, the result is the same in terms of public perception of inaction.
The longer the crisis progresses without Buffett inking a blockbuster, or at least an obviously value-additive deal, the antsier Berkshire investors are liable to get, in my opinion. We have trusted Buffett for decades as a shepherd of our capital, and Berkshire has always eschewed returning cash directly to shareholders via a dividend (though the company has made liberal use of stock buybacks in recent years). Berkshire’s justification for hoarding cash on its balance sheet has always been that it can deploy it with market-beating results, especially in times of market crisis, where cash is king.
Time to return cash to shareholders?
Whatever the reason for Buffett staying his hand now, the case for holding that cash could soon come under threat. Berkshire’s cash balance will be hard to justify post-crisis, in my view, if it is not deployed to significant effect during the chaos. As The Rational Walk opined on April 15, if Berkshire cannot deploy its cash effectively in a crisis, it may want to consider returning it to shareholders for public relations purposes:
“If we exit this crisis with Berkshire unable to opportunistically deploy meaningful capital, a return of capital is inevitable and would be proper. I hope repurchases will be heavily utilized, especially at current prices, to avoid risk of taxable dividends.”
Disclosure: Author is long Berkshire Hathaway.
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