What Warren Buffett, Tim Cook, and Notorious B.I.G. All Have in Common

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Warren Buffett and Tim Cook have a problem. It's a problem any of us would love to have. Their companies, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) and Apple (NASDAQ: AAPL  ) , have too much cash on hand. Berkshire's cash positioned has ballooned past $40 billion once again, and Apple has a similar amount in cash and short term investments in addition to its long-term investments.

Many in the media believe each company has more cash than they know what to do with. Maybe they should get together to buy the rights to a Diana Ross song and pay for a studio session with Sean "Diddy" Combs to remake "Mo Money, Mo Problems." But despite how awesome that would be, it would hardly put a dent in their cash positions. Instead their best bet is to keep doing what they're doing and buy back shares of their own company when it looks undervalued.


On acquisitions
Shareholders and the media are clamoring that Apple and Berkshire Hathaway need to be making big acquisitions. In fact, Apple is making acquisitions -- it made 15 in fiscal 2013 -- and Berkshire continues to make small "bolt-on" acquisitions totaling $830 million through the first nine months of the year.

2013 has been a great year for investors, but that means buying opportunities for value investors are fewer and farther between. Buffett champions having the discipline to buy when markets are cheap. He did so in 2009 when he bought the country's largest railroad and extracted convertible preferred deals from GE, Goldman Sachs, and Bank of America. But with the market trading around all-time highs today, it's hard to find value. With $40 billion in cash, Buffett could make a significant acquisition during the next market correction.

Apple has never been one to make big-money acquisitions. The company's biggest acquisitions was when it bought NeXT for $400 million to bring back Steve Jobs. In 2013, however, it accelerated the rate at which it makes acquisitions to one every three to four weeks. In other words, the company is spending more on acquisitions, as shareholders demand, but it's doing it the Apple way -- buying companies that already do something that will directly benefit Apple's existing or pipeline products.

Small acquisitions are great for both companies. They're low risk, and provide a great opportunity to unlock synergistic value.

On share buybacks
Carl Icahn has been pressuring Tim Cook to make a huge $150 billion share buyback of Apple stock. Although a buyback will certainly prop the stock price up, it seems much more short-sighted than consistently increasing research and development spending, making small acquisitions, and returning excess cash to shareholders through regular dividends and measured buybacks.

Apple still has $37 billion left in its share repurchase program scheduled through December of 2015. It will return slightly more through shareholder dividends in the same time. Considering Apple hasn't made a dent in its net cash position since announcing a significant capital return program, it may elect to accelerate its dividend growth or share repurchase plans, but I wouldn't expect the immediate buyback Carl Icahn wants.

Meanwhile, Berkshire Hathaway has a very well defined buyback policy. The company must have at least $20 billion in cash on hand -- check -- and shares must trade for no more than 20% above book value -- no check. Shares of Berkshire Hathaway haven't traded below 1.2 times book value since the beginning of the year. The market has been extremely bullish this year, and shares have traded around 1.4 times book value since June.

Those rules aren't set in stone. Berkshire broke its own rule back in December of last year, when it bought $1.2 billion in stock from the estate of a longtime shareholder. At the time, the buyback threshold was 10% above book value and shares were trading for 17% above book value. That instance seemed to be a special case, however, as management otherwise risked 9,200 shares being unloaded in a market for a stock that averages volume of just 441 shares per day. I wouldn't expect management to buy back shares higher than 1.2 times book value in the near future.

BRK.A Price to Book Value Chart

BRK.A Price to Book Value data by YCharts

"Me lose my touch? Never that!"
The more the media make a big deal out of Apple and Berkshire Hathaway's cash positions, the more likely it is to present a good buying opportunity for either stock. I'm pretty sure Warren Buffett still knows how to make good acquisitions, and I'm pretty sure management at Apple knows how to best return value to shareholders.

Diddy was right when he said, "10 years from now we'll still be on top." The same is true for Apple and Berkshire Hathaway.

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9/29/2016 4:00 PM
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