I'd love to be able to reveal the next CEO of Berkshire Hathaway
They need lots of cash
Berkshire doesn't break out capital expenditures by subsidiary company, so I used some publicly traded peers to highlight the significant investments some of its more recently acquired companies require:
Berkshire Hathaway Company |
Publicly Traded Peer |
Capital Expenditure / Operating
|
---|---|---|
Burlington Northern Santa Fe |
Union Pacific |
76.8% |
Marmon Group |
General Electric |
35.1% |
MidAmerican Energy |
Exelon |
53.7% |
Source: Capital IQ, a division of Standard & Poor's.
Buffett has spent a lifetime building Berkshire Hathaway, "a sweeping canvas that is his masterpiece," in the words of his biographer, Alice Schroeder. While he takes a hands-off approach to the running of Berkshire's subsidiary companies, one of his critical roles is capital allocation -- deciding what to do with the enormous gobs of cash these companies generate (in the 12 months to Sept. 30, 2009, Berkshire free cash flow was $6.2 billion).
Idiot-proofing Berkshire Hathaway
Shifting toward capital-intensive businesses and accepting "decent returns" (Buffett's words) over outstanding ones is Buffett's solution to the problem of Berkshire's size -- quite simply, there are fewer external opportunities to reinvest Berkshire's cash that will make a difference to its bottom line (Microsoft
Buffett once quipped: "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." Embracing capital-intensive companies may be an effort to mitigate that risk within his own enterprise.
Warren Buffett is simply playing with too much money to invest in small-cap stocks, but you aren't. Anand Chokkavelu highlights the home run stock that Buffett can't buy.