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Warren Buffett's $109 Billion Cash Problem: How Much Longer Will It Continue?

By Matthew Frankel, CFP® - Updated Nov 7, 2017 at 2:36PM

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Berkshire Hathaway’s cash hoard has swelled to a 12-figure sum.

Berkshire Hathaway (BRK.A 0.10%) (BRK.B -0.03%), the conglomerate led by billionaire Warren Buffett, reported its third-quarter earnings recently, and we learned that the company's already-large cash hoard had grown by more than $9 billion. As of Sept. 30, Berkshire was sitting on more than $109 billion in cash, which represents nearly one-fourth of the company's entire market cap, and the Oracle of Omaha is undoubtedly feeling the pressure to start putting it to work.

Why is $109 billion in cash a bad thing?

To be clear, having a massive sum of cash is certainly a good problem to have. It's certainly better than not having enough cash, or having too much debt. However, it's still a problem.

Warren Buffett in a grey suit.

Image source: The Motley Fool.

The problem is that this is $109 billion that's earning little or no returns, instead of being put to work to earn the company and its shareholders more money. For example, a few billion dollars invested in a business that generates a 10% annualized return on investment is certainly better than a few billion dollars invested in short-term Treasuries at 1%.

Buffett and his management team have openly recognized that it has a cash problem. After all, Buffett has said that he prefers to keep at least $20 billion on hand, so this represents nearly $90 billion of excess capital. That's a lot of money to put to work efficiently, and Buffett said at the company's shareholder meeting in May that the question is, "Are we going to be able to deploy it?"

So far, the answer to that question has been "no." Berkshire recently agreed to buy 38.6% of Pilot Flying J, but the entire company is estimated to be worth about $9 billion, so this doesn't make a serious dent in Berkshire's cash.

How Buffett wants to use the cash

Obviously, the company's No. 1 choice would be to acquire a business, or several. This has been Berkshire's primary growth mechanism over the years. However, that's been easier said than done recently, as finding attractive bargains has proved to be rather difficult now that we're eight years into a bull market.

Berkshire would also need to make a pretty large acquisition -- say, $5 billion or more -- to have a meaningful potential impact on the company's bottom line, which significantly limits its investable universe. The potential is there, though, as Berkshire has quite a war chest to work with. Just to put Berkshire's buying power in perspective, Berkshire could theoretically acquire a company the size of PayPal Holdings, Adobe, or Caterpillar and still leave $20 billion in reserves.

Including the potential for debt financing, Buffett's right-hand-man, Charlie Munger, has estimated that Berkshire's buying power is as much as $150 billion -- and that was before Berkshire's cash hoard surpassed $100 billion.

Common stocks are another option that Buffett would prefer to use Berkshire's cash on, but the same problem applies. Stock valuations are high in general, and while Buffett and company have found some stocks to buy recently, such as Synchrony Financial and Store Capital, these were relatively small purchases and didn't stop the cash hoard from growing.

Buybacks and dividends

Buying back stock and paying dividends aren't Buffett's preferred way of using Berkshire's capital, but he realizes that at some point they become better options than "do nothing."

Berkshire's buyback threshold is currently set at 120% of book value, a point where the company's board feels that shares would trade at a significant discount to their intrinsic value. Currently, the stock trades for more than 145% of book, well above the current threshold. However, Buffett has acknowledged that the board could revisit this policy if the cash continues to accumulate.

Finally, a dividend appears to be on the table now, much to the surprise of Berkshire's shareholders. Berkshire hasn't paid a dividend since 1967, but Buffett mentioned the possibility at Berkshire's shareholder meeting.

Based on the rate at which the company's cash stockpile grew during the third quarter, Berkshire could afford to pay a $3.85-per-share quarterly dividend on the B shares, which would translate to a 2.1% yield. And this wouldn't even use any of the company's current cash -- it would merely keep the pile of cash from growing further.

What's the best course of action for Buffett and company?

Like most shareholders, I'd love for an attractive opportunity to acquire a large company to present itself, but I'm not holding my breath. It's tough to say what Buffett will decide to do, and it could come down to a combination of the possibilities -- a few smaller acquisitions, some buybacks, and some dividends.

The takeaway is that as Berkshire's cash hoard continues to grow, the situation becomes more urgent for Buffett and his team, and now that there's well over $100 billion sitting on the sidelines, I would be surprised if Berkshire didn't start putting some cash to work sooner rather than later.

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