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Rupert Hargreaves
Rupert Hargreaves
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How Much Cash Does Berkshire Hathaway Really Have?

Buffett might not have as much free cash as media reports suggest

June 02, 2020 | About:

One of the most closely watched metrics among Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) followers is the conglomerate's overall cash balance.

For example, after the group published its first-quarter earnings for the period ended March 31, financial media was full of reports highlighting the fact that Warren Buffett (Trades, Portfolio)'s investment vehicle ended the month of March with a "record" cash balance of $137 billion.

However, this widely reported figure is misleading for several reasons. For a start, the $137 billion number is an aggregation of all the cash in the group at the holding company level. It is entirely unrealistic to say that Buffett has this amount of money available at his disposal to make a deal whenever he sees fit. A large percentage of this capital is held in various Berkshire subsidiaries.

Due to the limited information provided in the company's regular reports, it's impossible to tell precisely how much money is held in each subsidiary. However, the annual reports do provide a rough guide. According to the group's 2019 annual report, at the end of last year, Berkshire's Energy, Railroad and Utilities business reported accounts payable, accruals and other liabilities of $15 billion as well as $66 billion of borrowed funds. A conservative business manager might want to keep cash equivalent to all current liabilities on the balance sheet at any one point. If Buffett were to take a conservative approach, as he typically does, it would suggest a cash requirement of at least $15 billion for these businesses alone.

On top of this, there's the cash requirement for the insurance side of the business. On multiple occasions, Buffett has said that he wants to keep at least $20 billion in a cash buffer to protect against significant insurance events, such as once-in-a-century storms. This is likely to be a conservative estimate simply because, if losses are paid out in a significant insurance event, the company will need more capital to fill the gap. In 2018, Buffett claimed that a mega catastrophe with total insured costs of $400 billion would only cost the group $12 billion. That suggests Berkshire will need $32 billion to cover losses and maintain its substantial cash cushion, which is required to support its relationship with counterparties.

Adding all of the above together, plus an extra $5 billion for general working capital purposes and a 20% margin of safety, and subtracting it from the $137 billion results in an estimated "real" amount of cash available for acquisitions that may be closer to $75 billion. That is still a substantial sum, but not as high as the $137 billion usually quoted (keep in mind, this is still just my own rough estimate).

So what does this mean for investors? The main takeaway is that Buffett does not have as much cash as available for an acquisition as media reports suggest. Although, if he does find a big deal he likes, nothing is stopping the Oracle of Omaha from borrowing additional money or issuing shares (even though he has said in the past he would rather not issue stock to complete acquisitions).

It's also important to consider these cash allocations when analyzing the group's share repurchase activities. Buffett has attracted some criticism for not spending huge amounts of money buying back shares in the past two years, but with a total outlay of $5 billion to $10 billion, he has spent around 10% of this free cash. That's a big chunk of capital returned to investors.

While the number of shares retired as a percentage of overall outstanding shares is much less impressive, unlike the vast majority of other companies, Berkshire has been repurchasing stock without borrowing vast amounts of money or compromising its financial position in any way. Buffett has built Berkshire to be a fortress, and he won't compromise that even if the group's shares look cheap.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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