Filed under: Company News, Mergers & Acquisitions, Value Investing, Warren Buffett, Investing
1. Passive Income
First off, Berkshire Hathaway's (BRK-A) money stockpile seems to be more a result of passive income than any coordinated attempt to raise cash for strategic purposes. According to its most recent 13F filing, the proceeds from the sale of stocks - which include DirecTV (DTV), General Motors (GM), Phillips 66 (PSX) and Starz (STRZA) -- basically paid for increased purchases in existing positions like U.S. Bancorp (USB) IBM (IBM) and Walmart (WMT).
Instead, the bulk of its hoard has come from the compounding effects of more than $1 billion in profits that are generated each month by its portfolio of companies.
2. Not a Historically Significant Amount
Though $55 billion seems like a large number, it only amounts to roughly 10 percent of Berkshire Hathaway's assets, which on a percentage basis is down from a decade ago. This is because Buffett has been buying utilities and railroads, whose capital structure has greatly expanded the balance sheet. This means that on a relative basis it is not a significant amount in terms of the need to allocate.
3. Saving for a Rainy Day
Buffett has said that he likes to hold between $25 billion and $30 billion in cash to cover any unexpected claims for natural disasters from his insurance companies.
Backing out those cash reserves and using the current cash flow numbers, that means that Berkshire only has about two years' worth of excess cash lying around. That still is a sizable amount of investible capital, but it does help to put the top-line numbers in to better perspective.
4. Upkeep and Maintenance
Berkshire's expansion into railroads, utilities and energy has paid off handsomely, and that is one of the main reasons the company throws off so much free cash -- but it comes with a price. All of these sectors are capital-intensive, regularly requiring massive amount of money to modernize equipment and maintain infrastructure.
The potential for interest rates to increase is also a concern with these types of businesses. Having cash on hand to finance future capital expenditures could give Berkshire a competitive advantage over rivals that need to take on debt.
5. Not Many Options
After the financial crisis of 2008, Buffet went on a buying spree, snapping up stakes in companies like Goldman Sachs (GS), Bank of America (BAC) and Dow Chemical (DOW), where share prices had been beaten down dramatically.
These are the types of "fat pitches" that Buffett has repeatedly said he waits for: Situations where no matter what you do, it's very, very hard to miss. But with the mergers and acquisition cycle near record highs, there are few such balls out there to swing at.
According to Prequin, a London-based research firm, private-equity firms -- Berkshire's rivals in the acquisition game -- are sitting on a record $1.2 trillion in capital as of July. These firms, which are often under pressure from limited-partners to invest, and which may lack a long-term investing philosophy, have been driving up prices of potential acquisition targets, making it harder for find the types of bargains that Buffett is known to prefer.
6. Not Many Alternatives
With few if any attractive M&A targets in view and an equilibrium-type focus on individual stocks, there are limited options for Buffett's dry powder, none likely, based upon history.
Berkshire has only paid out a dividend once, more than 40 years ago. Illustrating his disdain for the practice, Buffett once said, "I must have been in the bathroom when that decision was made."
Bonds are another area where he could park his excess cash, but earlier this year Buffett cut his allocation to bonds to the lowest levels in more than a decade. With yield so low, he indicated his current distaste for them as a class, saying that they are "wasting assets."
7. The Outlier
Despite all outward signs to the contrary, the 83-year-old Buffett may be closer than we think to transitioning out of the day-to-day operations of the company. Though nobody expects him to ever completely retire (at least, not as long as his physical and mental health holds up), he has previously announced that a succession plan is in place at Berkshire.
There is a possibility then that he will hold onto that $55 billion because he knows that any significant acquisition would likely be managed long-term by his successor, and he might be waiting for a formal announcement of that succession.
Patience and Discipline Are Financial Virtues
One thing is for sure, Buffett has a history of patience and discipline when it comes to spending investor's cash.
In Berkshire's 1998 annual letter to shareholders, Buffett referenced six-time batting champion Ted Williams as his inspiration and model for his investing philosophy.
"Unlike Ted, we can't be called out if we resist three pitches that are barely in the strike zone," Buffett wrote. "Nevertheless, just standing there, day after day, with my bat on my shoulder is not my idea of fun."
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