Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) has a tremendous amount of cash on its balance sheet. The conglomerate has been stockpiling cash since its last major acquisition in 2016.
As a result, even though it has spent nearly $30 billion buying back its own shares during the past 12 months, the cash pile has continued to grow.
The growing cash pile
In the first quarter, Berkshire's cash rose 5.2% from three months earlier to a near-record $145.4 billion at the end of March. This cash hoarding has attracted some criticism. Rather than retaining so much cash earning 0%, critics argue, Buffett should be using the capital for more productive means.
However, Buffett has responded that by holding cash on the balance sheet, he is protecting Berkshire. More importantly, this cash cushion gives the group options and flexibility to invest in what it sees fit whenever the opportunity arrives.
For Buffett and Berkshire, cash is stability, but how much does the business really need? Of course, there's no one set number. For example, there's no guarantee even its current cash pile would protect Berkshire from a significant insurance event, such as a string of natural catastrophes along the East Coast or a cyber/terrorist attack on an important population center. The truth that a lot of people like to ignore is the Berkshire needs to keep a lot of cash on its balance sheet - this cash is an essential part of what allows it to write policies that competitors simply can't match.
Nevertheless, Buffett has said in the past that he wanted to keep only as much as $20 billion in Berkshire's bank accounts at all times as a cushion against disaster. And the Oracle of Omaha provided an update on this view at the recent Berkshire annual meeting. Specifically, he said:
"We've got probably 10% to 15% of our total assets in cash beyond what I would like to have just as a way of protecting the owners and the people that are our partners from ever having us ever getting a pickle. You know, we really run Berkshire and make sure that we don't want to lose other people's money who stick with us for years. We can't help somebody who does and buys it today and sells it tomorrow. But we've got a real gene that pushes us in that direction, but we've got more than we… We've got probably $70 billion or $80 billion, something like that, maybe that we'd love to put the work, but that's 10% of our assets, roughly."
This statement is quite interesting because it implies he has revised his $20 billion cash target.
Protection policy
It now seems as if Buffett is looking for a percentage of assets rather than a fixed figure. For example, if Berkshire were to deploy $70 billion, based on the March 31 cash balance of $145.4 billion, that would leave $75.4 billion in the bank, roughly 10% of total group assets.
This might seem overly cautious to some, but the overriding goal of Berkshire is to protect and grow shareholders' capital. That's why Buffett wants to hold so much cash.
What about the other $70 billion to $80 billion? That's a lot of funding, and it opens up a range of businesses that the company might be interested in purchasing.
Buffett complained at the meeting that it was becoming harder to deploy this capital because other investors were willing to pay higher multiples for businesses.
When talking about business owners who would like to sell, Buffett said, "the market option they have is just, is too great for them." Publicly traded companies, he went on to add, are generally worth far more than Berkshire would be willing to pay for the business as a whole.
So it seems the Oracle of Omaha has a dilemma. He has plenty of capital to deploy, and wants to deploy it, but there are very few takers. That would explain why he's been so happy to buy back Berkshire's own stock over the past 12 months.
Disclosure: The author owns no share mentioned.
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