What Berkshire Could Do With Its Growing Cash Hoard
Greggory Warren: A big topic for us of late with regard to wide-moat rated Berkshire Hathaway is the company's growing cash hoard and the changes it could produce in capital allocation decisions longer term.
With the firm expected to generate $5 billion to $10 billion in quarterly free cash flows going forward, and valuations for both public and private businesses elevated, we envision Berkshire surpassing the $150 billion balance sheet cash threshold that CEO Warren Buffett said would be difficult for him to defend longer term.
As we see it, Berkshire has five uses for its cash: acquisitions, stock investments, capital expenditures, share repurchases, and dividends.
On the acquisition front, we see some deals that the firm could do in the near term--including wide-moat rated Colgate-Palmolive and John Deere--that would meet the criteria Buffett looks for in stand-alone businesses. We also expect Berkshire to be a consolidator in the utilities/energy segment, once prices get more attractive.
The problem for Berkshire, though, is that it needs to continuously do sizable deals to keep cash from building up on its balance sheet, something it has had little success doing the past 10 years. While the company has put some capital to work in common stocks of late, there are limits to what Berkshire can do with equities, owing to the size of its $200 billion stock portfolio.
As for capital expenditures, we don't believe Berkshire will get the same level of relief from its capital-intensive businesses that it has in the past, with both Berkshire Energy and BNSF coming off abnormally high levels of capital spending.
This really leaves share repurchases and dividends as the only way for Berkshire to meaningfully reduce its cash balances in the near term. Despite having a share repurchase program in place, though, Berkshire has not bought back any stock since December 2012. This has been due to the fact that the company's shares rarely trade below 1.3 times book value, let alone the 1.2 times book value per share threshold required for the company to start buying back stock. Even if Berkshire were to lift the company's share repurchase threshold, perhaps to 1.3 times or higher, it's likely that that the perceived floor that exists under Berkshire's shares would be raised as well.
Failing to find opportunities to put a large chunk of its growing cash hoard to work before it reaches $150 billion, and unwilling to buy back shares at a higher price/book threshold, Berkshire may have no choice but to consider issuing a special one-time dividend to return capital to shareholders. While Buffett came out against this at the company's annual meeting this year, we think that he has painted himself into a corner here, and that absent a run down of cash balances he may be left with no choice but to return some capital to shareholders via a special one-time dividend in the near to medium term.