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How Berkshire Hathaway Could Spend Its $100 Billion Cash Hoard

By Matthew Frankel, CFP® - Oct 5, 2017 at 6:41AM

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Warren Buffett's company has far more cash sitting on its books than he prefers.

Berkshire Hathaway (BRK.A 1.69%) (BRK.B 1.64%), the conglomerate led by billionaire Warren Buffett, is sitting on a cash hoard of nearly $100 billion.

While there is no way of knowing exactly how Berkshire will decide to spend that cash, we do know a few important pieces of information. First, unlike many other cash-rich companies, virtually all of Berkshire's stockpile is held in the United States, and thus can be readily used without major tax consequences. Second, Berkshire's shareholders, as well as Buffett and Vice Chairman Charlie Munger, would love to put the company's cash to work. Third, there are five main options on the table when it comes to doing that.

Pile of bundles of $100 bills

Image Source: Getty Images.

Option 1: Acquire a large company (or several)

Berkshire's preferred way of spending its excess cash is to acquire entire companies, but under current conditions, this is easier said than done. Simply put, the economy is doing well, and valuations are much higher than they have been in previous years. At Berkshire's annual meeting this year, Buffett and Munger both agreed that finding compelling bargains that are large enough to add meaningful value to Berkshire has been extremely difficult.

This option looked more promising in August, when Berkshire agreed to acquire Texas-based utility Oncor, but the deal subsequently fell apart when Berkshire was outbid. However, the tide may be turning. Just hours before I wrote this, Berkshire announced that it had taken a significant minority stake in Pilot Flying J, which is certainly a step in the right direction.

One thing is for sure. With its $100 billion stockpile of cash, Berkshire certainly has the ability to make some game-changing acquisitions if it can find the right opportunities. Using cash alone, and setting aside  the $20 billion that Buffett prefers to have in the bank, Berkshire could still theoretically acquire Lowe's, Costco, or a similarly sized company.

And bear in mind that this is just considering cash. Using debt financing, Charlie Munger estimates Berkshire's true buying power to be in the $150 billion range if the right opportunity came along.

Option 2: Add to Berkshire's stock portfolio

It's doubtful that Buffett and his stock pickers would be able to efficiently put the $80 billion or so that it's looking to spend to work in a short period of time, but investing billions in common stocks in a single quarter is not uncommon for the company.

The main problem here is the same as with the acquisition situation: Stocks are expensive and finding undervalued companies is difficult. Buffett doesn't need screaming bargains, either. The Oracle of Omaha has famously said that he prefers "wonderful companies at fair prices," and Berkshire has indeed put some money to work in the stock market recently, opening new positions in Synchrony Financial and real estate investment trust Store Capital, and increasing positions in several of Berkshire's existing holdings.

If there happens to be a major market drop in the near future, there could certainly be opportunities to put a significant amount of the cash stockpile to work. At the market's current lofty valuation, however, Berkshire's stock buying is unlikely to make a huge dent in it.

Option 3: Buy back shares of Berkshire

Warren Buffett is open to the idea of using cash to buy back Berkshire shares – if the price is right.

Currently, Buffett and Berkshire's board have authorized buybacks if the stock falls to 120% of its book value or lower. It trades for more than 150% of book as I write this.

Buffett has mentioned that if the company keeps building up a surplus of cash, it may be necessary to revisit the buyback policy, and increase the threshold. For now, though, it looks like Berkshire's shares are a bit too expensive for buybacks.

Option 4: Pay a dividend

Not long ago, the prospect of Berkshire Hathaway paying a dividend was not even under discussion, but Buffett's tune is changing: He mentioned at the annual meeting that a dividend was a realistic possibility in the not-too-distant future.

It's important to point out that Berkshire could approach the idea in two ways. It could devise a long-term policy and start making regular quarterly payments to shareholders -- the approach most dividend-paying companies take. If, for example, Berkshire decided to pay a dividend equal to a 3% annual yield, it could drain $13.7 billion off its balance sheet every year.

Or, Berkshire could decide to pay a one-time special dividend, which I think would be more likely. With $80 billion in spendable cash, the company could afford to pay a special dividend of $33.28 per Class B share and about $50,000 for every Class A share. I don't see them spending quite that much, but a one-time payout that returns $20 billion to $30 billion to shareholders isn't out of the question.

Option 5: A combination of these things

In reality, the most likely answer to the question, "how will Berkshire spend its cash hoard?" is some combination of these things, but certain market environments favor different options more strongly. If the market drops significantly, the odds shift toward more acquisitions and stock purchases. If Berkshire's cash hoard continues to swell due to a lack of opportunities, buybacks and dividends will start to become more likely. Whatever the outcome is, I, like many other Berkshire shareholders, would love to see Berkshire step on the gas and start making some moves.

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