Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) second-quarter earnings report revealed that the company's cash stockpile has grown to nearly $100 billion, virtually all of which is located in the United States and would be relatively easy to put to work. Unfortunately, Warren Buffett and the rest of his team seem to be having extreme difficulty figuring out what to do with it.
Here's why Berkshire's massive stockpile of cash is a problem for Buffett and his shareholders -- and what the company might choose to do about it.
Why a $100 billion stockpile of cash is a problem
Berkshire Hathaway recently released its second-quarter 2017 earnings report, and its balance sheet showed that the company's cash hoard had swollen to a new all-time high -- just shy of $100 billion. Between all of its business segments, there's a total of $99.7 billion in cash, equivalents, and short-term investments in U.S. Treasury bills, which can be treated as cash for liquidity purposes.
This may sound like a good thing, but the problem is that this is $100 billion that isn't generating any substantial returns for Berkshire or its investors. Buffett likes to keep at least $20 billion in readily available cash at all times, and after the quarter ended, Berkshire announced its intention to spend $9 billion on an acquisition, but this still leaves more than $70 billion sitting on the sidelines. And unless Buffett and his team can figure out how to put this money to work, this stockpile of cash could continue to grow.
This is certainly a good problem to have, but it's still a problem.
Attractive investment opportunities have been difficult to find
As I mentioned, Berkshire has a pending $9 billion acquisition of Texas-based utility Oncor, but the last major acquisition the company completed was its $32 billion purchase of Precision Castparts. In reference to this purchase, Berkshire's Vice Chairman Charlie Munger said that "this is no screaming bargain like the old days," meaning that it's difficult to find compelling bargains in the current environment and with the current amount of money Berkshire has to spend.
Buffett agreed, pointing out that compelling bargains are tough to find now. In addition, as Berkshire has grown, it is even tougher, as even if a compelling bargain is found, it would need to be rather large to make a significant dent in the cash hoard and add meaningful value to Berkshire's earnings potential.
At the company's shareholder meeting in May, Buffett said that the question with the cash stockpile is "Are we going to be able to deploy it?" Buffett would prefer if an attractive acquisition opportunity came along, or if some of his favorite stocks went on sale, but there are a couple other ways to spend its cash that Berkshire may consider if it can't find anything to buy.
The buyback threshold could be raised
Although Berkshire doesn't buy back its own shares regularly or often, Buffett is actually a big fan of share buybacks -- when they make good financial sense.
In his 2016 letter to shareholders, Buffett said that for long-term investors, share repurchases only make sense if the shares are bought at a price below intrinsic value. "What is smart at one price is stupid at another," Buffett says.
To be clear, it's impossible to accurately pinpoint Berkshire's intrinsic value. If I were to ask five analysts to each compute how much a share of Berkshire Hathaway is truly worth, I wouldn't be surprised to get five different answers.
Buffett openly acknowledges that there's no way to precisely calculate intrinsic value, so Berkshire's current buyback authorization is set at a limit of 120% of book value (it's currently trading for about 146% of book value). Buffett and his team feel that, at this price, shares would be trading at a significant discount to intrinsic value. However, Buffett has recently said that if Berkshire continues to generate more cash than it can effectively use, the company may need to revisit its buyback policy, perhaps raising the threshold.
Could Berkshire actually start paying a dividend?
In the more than 50 years since Buffett took over Berkshire, the company has paid a single $0.10 dividend in 1967, and nothing since. Simply put, Buffett has always been able to produce more value for his shareholders by reinvesting Berkshire's earnings in ways that increase the company's earning power. Looking at the company's track record of generating more than twice the S&P 500's annualized returns over the past half-century, it's tough to make the case that this was a bad policy.
However, at the most recent annual meeting, many shareholders were surprised to hear Buffett mention a dividend as a realistic near-term possibility. Buffett said that dividends could be paid "reasonably soon, even while I am around."
Dividends are likely to be the last thing Buffett wants to do with Berkshire's cash, and would probably be a realistic possibility if and only if there were no attractive acquisition or investment opportunities, and Berkshire's stock price was significantly higher than the company's (not publicly known) estimate of its own intrinsic value.
Investors are hoping Berkshire finds bargains
Don't get me wrong -- buybacks and dividends are great ways to return capital to shareholders, when they make sense. They're almost always better choices than simply accumulating cash that isn't earning any returns.
However, Berkshire has an amazing track record of being able to add more value through acquiring companies and investing in stocks than it could through buybacks or dividends, and the company would love to continue doing so. And to be clear, Buffett has said that he wants to make a big acquisition or make a big investment, if a compelling opportunity were to present itself.
I think it's fair to say that many Berkshire shareholders, myself included, are hoping that the Oracle of Omaha and his team find some compelling ways to put the cash to work, before the stockpile gets too much bigger.