Warren Buffett's $112 Billion Cash Problem -- What to Expect in 2019

The Oracle of Omaha has a 12-figure cash hoard at his disposal and few viable ways to spend it.

Matthew Frankel, CFP
Matthew Frankel, CFP
Feb 27, 2019 at 8:18AM
Financials

Warren Buffett recently released his annual letter to Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) shareholders, and one thing investors weren't too surprised to learn is that Berkshire has cash -- a lot of it. After a few quarters of successfully reducing its cash via stock investments, Berkshire finished 2018 with roughly $112 billion in cash and equivalents, an increase of more than $8 billion from the third quarter.

In Buffett's letter, investors also learned how Buffett plans to use the company's cash hoard going forward. Here's how much of Berkshire's cash Buffett is willing to spend under the right circumstances, how he'd like to use it, and how he probably will use it in 2019.

Pile of stacks of $100 bills.

Image source: Getty Images.

How much cash is Buffett willing to part with?

To be perfectly clear, Buffett loves having lots of cash on hand. Being a cash-rich company has allowed Berkshire to make some particularly savvy investments when times get rough, such as its financial-crisis-era investments in Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC).

However, even Buffett doesn't want too much cash. It's bad for profitability to keep an unnecessarily large amount of cash on the sidelines instead of it being invested and generating returns.

Buffett's magic number is $20 billion. He likes to hold at least this much in cash equivalents in order to "guard against external calamities." He wants Berkshire to always be extremely financially solid and to never need to raise cash in a pinch, no matter what.

So, doing the math, this means that Buffett's current investment budget is roughly $92 billion when it comes to making an acquisition or otherwise putting money to work. To put this number in perspective, this is greater than the market caps of companies such as Starbucks ($88.6 billion) and Lowe's ($85.0 billion). In short, that's a lot of money to spend.

Here's what Buffett would love to do

Longtime followers of the Oracle of Omaha are probably not surprised to learn that Buffett wants to acquire an entire business. And the bigger the better. As Buffett puts it, "we continue, nevertheless, to hope for an elephant-sized acquisition."

However, just like Buffett said at the end of 2017, businesses want ridiculously high valuations as takeover targets. He reiterated this point in his latest letter: "The immediate prospects for that (buying an entire business), however, are not good: Prices are sky-high for businesses possessing decent long-term prospects."

Here's what will probably happen in 2019

In 2018, Berkshire was a net buyer of stocks, to the tune of $24 billion ($43 billion in purchases and $19 billion in sales). Buffett says that the stock market was by far the more attractive place to put capital to work in 2018, as opposed to trying to buy an entire company. "Charlie and I believe the companies in which we invested offered excellent value, far exceeding that available in takeover transactions," Buffett wrote in his letter.

Buffett sees more of the same in 2019. "That disappointing reality [high takeover valuations] means that 2019 will likely see us again expanding our holdings of marketable equities."

It's also worth mentioning that Berkshire's buyback plan was amended in mid-2018 in order to make it easier for the company to repurchase Berkshire stock. During the third and fourth quarters, Berkshire repurchased nearly $1.5 billion of its own stock, and it's fair to assume that as long as Buffett continues to believe it's priced attractively, more buybacks are probably in store.

While Buffett may be disappointed that Berkshire's acquisition prospects aren't great, shareholders would likely be very happy to see Buffett and company deploy a significant amount of capital into stocks and buybacks. After all, that's certainly more desirable than having it sit in cash equivalents and earn minuscule returns.

Check out the latest earnings call transcripts for companies we cover.