At the end of the second quarter, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) reported having $64.56 billion in cash and equivalents and $46.54 billion in short-term investments in U.S. Treasury bills, which can essentially be considered cash for liquidity purposes. This adds up to $111.1 billion, an increase of about $2.4 billion from last quarter's $108.6 billion stockpile.
However, aside from one major windfall, it doesn't appear that Berkshire's cash hoard has increased by much at all. Here's a rundown of what we know about the company's cash position, why it's a problem in the first place, and how CEO Warren Buffett and his team could end up using the cash to create value for shareholders.
A big asterisk
One important point to mention is that excluding one influx of cash, it doesn't appear that Berkshire's cash increased by very much at all.
Berkshire's cash increased by $2.4 billion during the second quarter, but it's interesting to note that this is exactly the amount that Berkshire received when Monsanto (which was in Berkshire's stock portfolio) was acquired by Germany's Bayer during the quarter.
In other words, excluding this windfall, Berkshire's cash didn't grow at all. It appears that all of the excess cash generated by its operating businesses during the second quarter has been successfully reinvested. And since we know that Berkshire hasn't made any acquisitions recently, it's fair to assume that Berkshire was an active buyer of stocks during the quarter. In fact, the company's earnings report indicates that its Apple stake might have grown again.
Unfortunately, Berkshire's earnings reports don't contain a complete and updated list of the company's stock holdings. However, it seems like Berkshire did a fairly good job of keeping its cash hoard from growing too much and I wouldn't be at all surprised to see several new or expanded stock positions in Berkshire's portfolio when we get a glimpse at its 13-F filing next week.
Wait, why is so much cash a bad thing?
At this point, you may be wondering why I'm so concerned with Berkshire Hathaway's cash position growing. After all, isn't having over $100 billion in the bank a good thing?
Well, not really.
To be sure, having too much cash is a much better situation than not having enough cash, and it's certainly better than having an abundance of debt. And to some degree, having more cash than your competitors is a competitive advantage. In fact, Buffett insists on keeping at least $20 billion in cash on hand at all times to be sure that Berkshire never faces any financial obligations it can't meet and so the company can take advantage of investment opportunities when times get tough.
As Buffett puts it, "Cash... is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent."
Well, Buffett's quote may need to be amended given the current cash situation. Berkshire's cash has gotten so plentiful that he, Vice Chairman Charlie Munger, and Berkshire's shareholders are constantly thinking about it.
The problem is that with about $91 billion more than Buffett wants to keep around, this is money that represents nearly one-fifth of the company's entire market cap that is sitting around earning little or no returns. To be fair, more than $46 billion is in short-term U.S. Treasuries that yield about 2% annually as of this writing, so the cash hoard is earning a bit more than it did about a year ago. However, that's still a paltry return compared with what Berkshire could get from buying businesses.
The three ways Buffett wants to use Berkshire's cash
Warren Buffett has been very clear in the past when it comes to his preferred uses for the cash generated by Berkshire's businesses and its stock portfolio.
First and foremost, the cash is used to make sure all of the capital requirements of the company's existing businesses are met. This should go without saying. However, after this is taken care of, billions of dollars are still being generated each quarter.
Next, Buffett likes to acquire entire businesses, an area in which the company hasn't had much success lately. In fact, Berkshire hasn't made a significant acquisition since its 2015 purchase of Precision Castparts. Simply put, Buffett hasn't been able to get around the high valuations of potential acquisition targets. The lack of acquisitions is the No. 1 reason Berkshire's cash hoard has gotten so large.
After meeting current capital requirements and exploring potential acquisitions, Buffett is willing to put Berkshire's capital to work in the stock market. The company has a massive stock portfolio, and in recent quarters, has had some success in finding attractive stock investments, but not to an extent that it's making a meaningful dent in the cash stockpile.
One new possibility has opened up
Finally, if there are no other alternatives, Buffett is willing to use Berkshire's cash to buy back stock. The only problem is that until very recently, he hasn't been allowed to do so unless shares were trading for less than 120% of book value.
However, Berkshire's board of directors recently amended the repurchase plan. Now, the company can buy back stock at any time when both Buffett and Vice Chairman Charlie Munger agree that it's trading for less than its intrinsic value. There is no limit to how many shares they can repurchase under this provision, nor is there any time limit.
It remains to be seen whether Berkshire will actually buy back any shares. For all we know at this point, Buffett and Munger could think the stock is too expensive. However, this does give Buffett and his team another tool with which they could potentially tackle the lingering cash problem.
Matthew Frankel owns shares of Apple and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.