Have you ever had more cash than you know what to do with? It sounds like a good problem to have. Unless you’re an asset manager, in any case. And so we have Berkshire Hathaway: they are a cash generating machine at this point but they seem not to be able to spend that cash. This, to be fair, is better than struggling for cash. But, it still presents a conundrum.
Berkshire Hathaway’s stock price has increased 14% year to date, broadly in line with the S&P500. They have now released their Q3 earnings. These show strong operating earnings, but weak investment performance. They also show a ballooning cash balance. Let’s look into some of the key takeaway.
Cash holdings: Berkshire Hathaway now has $157 billion in cash holdings. What are they doing with this cash? Well, they are not using it for buybacks, dividends, or equity purchases. The cash sits as literal cash and in short term treasuries. Investment sin short term treasuries increased 33.6 billion. Berkshire Hathaway has previously indicated its preference for short term treasuries. Warren Buffett stated:
“Berkshire bought $10 billion in U.S. Treasurys last Monday. We bought $10 billion in Treasurys this Monday. And the only question for next Monday is whether we will buy $10 billion in 3-month or 6-month”
Operating earnings rose 40% year on year to $10.761 billion from $7.651 billion. By contrast, Factset reports that the S&P500 is on track to see earnings growth 2.7% y/y. But, there is significant variation across sector.
Investment losses: On A GAAP reporting basis, Berkshire reported a substantial investment loss of $24.1 billion in the third quarter, primarily attributable to the conglomerate’s stake in Apple (AAPL), which dropped about 12% in value since the beginning of June.
Berkshire Hathaway warns investors to not look at quarterly investment gains or losses. However, with every other fund manager, you would. Berkshire Hathaway’s exhortation is based on the idea that they are a long term investor. However, even then, the returns must come from somewhere and if stock prices fall, it could imply a fall in dividends or buybacks if the falling prices reflect poor earnings, as was the case with apple. But, investment earnings have been volatile and it spears their equity positions are worth more than they were at the beginning of the year.
Muted share distributions: During the September quarter, Berkshire only repurchased about $1.1 billion of its own stock, compared to $5.9 billion repurchased in the first six months of the year. However, Berkshire Hathaway has also not made large investments. Their equity investments have only increased 10 billion in the first 9 months of this year.
The increase in equity securities appears to be largely due to increases in stock prices rather than purchases. This is backed up by the cash slow statement, which indicates they spent 9.1 billion in equities in the first nine months, but sold $32.786 billion of equities. They were a net seller of equities. This tend has continued throughout the year.
The cash stock pile has increased, as indicated. This might imply that Warren Buffett is looking for opportunities, they regard their stock price as already strong, or they simply enjoy high fixed income rates.
The net result is that Berkshire Hathaway’s earnings have generally been strong. But, investors should pay attention to what Berkshire Hathaway does with its cash holdings and pressure for a payout if Berkshire Hathaway does not find a better use for the cash than investing in treasuries.