Berkshire cash balance

Berkshire’s cash is growing because its operating companies, and especially its railroad, energy division and other big industrial businesses, bring in more money than they can use, to the tune of about $1.5 billion a month.

Warren Buffett has more cash on hand than ever, passing $100 billion for the first time.

And compared with Berkshire Hathaway Inc.’s assets, today’s cash pile is the biggest since just before the financial crisis of 2008.

The Omaha investment company’s buildup of bucks is of interest to its 1 million or so stockholders because having cash is, according to Buffett himself, a guaranteed long-term money-loser, gradually eaten away by inflation.

“It’s a fiendish problem, and he’s not the only one that has it,” said George Washington University law professor and Berkshire follower Lawrence Cunningham. “There are a lot of companies with enormous cash piles right now, the result of significant business generation and prosperity.”

Why so much cash?

Right now it’s difficult for Buffett, the chairman and chief executive of Berkshire, to put Berkshire’s money to work by buying big, successful businesses that would earn future profits or by making investments in other publicly traded companies.

“If you want to buy things at the right price and you’re a value investor, you’re probably looking long and hard at some of these valuations,” said Cathy Seifert, an equity analyst at CFRA Research in New York City.

Among other reasons it’s difficult for Buffett to deploy Berkshire’s cash:

» Other buyers, including private equity funds, have lots of cash, too, and may make higher offers when something comes up for sale.

» Buffett won’t take part in “auction” purchases, declining to bid against other possible buyers. Instead, he makes an offer and lets the seller decide whether to proceed.

» There’s no pressure at Berkshire to make acquisitions just because the cash is available. “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot,” Buffett once said, comparing the financial game to baseball. “And if people are yelling, ‘Swing, you bum!,’ ignore them.”

» Buffett keeps at least $20 billion of Berkshire’s cash available for unexpected costs, such as paying insurance claims on a natural disaster like a catastrophic hurricane.

» More owners are reluctant to sell because they would have to find other uses for the cash they would receive.

Berkshire’s cash is growing because its operating companies, and especially its railroad, energy division and other big industrial businesses, bring in more money than they can use, to the tune of about $1.5 billion a month.

Berkshire reported recently that it had $99.7 billion in cash on June 30, so it hit the $100 million mark sometime in early July.

That’s 15 percent of its $665 billion in assets. Over the past decade, that percentage was as low as 7.2 percent in early 2010, according to calculations from Berkshire’s financial reports.

Today’s 15 percent is the biggest share of assets since the end of 2007, when capital totaled 16.2 percent — $44.3 billion out of $273 billion in assets.

Having lots of cash just before the mortgage bubble burst and some big financial companies folded turned out to be an advantage for Berkshire.

With a financial crisis underway, Berkshire was able to supply billions of dollars to companies that needed it, earning big dividends for several years.

By mid-2009, Berkshire’s cash supply dipped to $24.5 billion, meaning that nearly all of Berkshire’s available cash was invested and potentially earning money for its shareholders.

Those investments have been successful, helping Berkshire to more than double its size in the past eight years.

Berkshire’s sheer size as a business today poses its own obstacle to rapid growth. It’s No. 2 on Fortune magazine’s latest listing of companies by revenue. Its assets total $665 billion, and its value on the stock market is about $440 billion.

That means any purchases and investments must be large enough to make a difference in the company’s financial results.

For Buffett, the purchase prices must be at least $5 billion, and companies must have a record of earning at least $75 million a year in pre-tax earnings. That rules out thousands of good businesses, although they can be absorbed by existing Berkshire companies.

Some investment companies are tempted to acquire simply because they have the money, said Cunningham, the law professor.

“The danger is that you feel that you have to invest, and you start relaxing your criteria and you make acquisitions that aren’t going to deliver,” he said. “It’s testing the firmness of their acquisition criteria.”

Another limiting factor:

Unlike some investment companies that take over businesses by acquiring stock and forcing changes, hostile takeovers are out of bounds for Buffett.

The latest example was Berkshire’s short-lived acquisition proposal in February for Unilever, the European-based food company valued at more than $140 billion.

Berkshire could have used up all of its extra money in that single deal, partnering with 3G Capital, the Brazilian finance firm that has joined with Berkshire in acquiring Kraft Foods and H.J. Heinz, among others.

Buffett and 3G made the offer but within a few days, Buffett said later, “it became very apparent that Unilever did not want this offer. ... I got calls indicating that the offer was unwelcome. ... I mean, if it’s unwelcome, there is no offer.”

Berkshire’s pending purchase of Oncor Electric Delivery Co., a Texas electricity network, would take up $11.2 billion of Berkshire’s cash. A decision is due in about a week. An investment fund is making a competing offer.

Many businesses start thinking about using excess cash to pay dividends, but Berkshire shareholders have said clearly that they agree with Buffett’s plan to keep the cash until the right purchases come along.

Berkshire would use large amounts of cash to buy up some of its own shares if the share price were too low, Buffett has said, but the share price is at near-record levels.

Seifert, the CFRA analyst, said she suspects that Buffett, Berkshire Vice Chairman Charlie Munger and investment lieutenants Todd Combs and Ted Weschler check out a steady stream of possible acquisitions.

If the stock market hits a “correction,” driving down prices by 10 percent or more, she said, “there may be more opportunistic deals that they participate in,” she said. “I don’t get the sense that the money is burning a hole in his pocket, but they are going to want to deploy at least half of it.”

The Omaha World-Herald is owned by Berkshire Hathaway Inc.

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