Warren Buffett’s distaste for overpaying is winning out over his frustration with sitting on a lot of cash.
With stocks at record highs, Berkshire Hathaway Inc sold $1 billion more worth of stocks than it bought last quarter, its biggest net selling since the end of 2017. Buffett spent last year building a massive stake in Apple Inc and pouring billions into investments in the biggest US banks. This year’s rally hasn’t drawn him in.
Buffett has previously dealt with the issue of cash piling up as he waits to strike, but never at this size. He hasn’t had a major acquisition in several years and has even pulled back on one of his newer ways to deploy cash, slowing down repurchases of Berkshire’s own stock in the second quarter. The result was that the company’s cash hoard — a major focus for investors in recent years — surged to a record $122 billion.
“It would be hard to look at the cash balance and their uses of cash in recent quarters and not be disappointed that they haven’t bought any companies, they haven’t bought much stock, and they haven’t bought back a lot of their own stock,” Jim Shanahan, an analyst at Edward Jones, said in a phone interview Saturday.
The growing cash pile is a reflection of the strength of the operating businesses that Buffett has assembled under one roof, and allows the billionaire investor flexibility to move quickly when big deals emerge. But he has acknowledged that having more than $100 billion earn little return for several years weighs on the company’s growth.
Buffett, 88, earned his legendary status by consistently outperforming the broader market, but Berkshire’s total return has trailed the S&P 500 over the last five, 10 and 15 years. That’s raised questions of whether Berkshire has grown too large to generate excess returns, and whether the cash would be better off returned to shareholders than left for his eventual successor to pursue a major deal.
Buffett has tried to get ahead of those concerns, spending his last few annual meetings and letters to shareholders extolling the value of keeping Berkshire together as a conglomerate and maintaining the company’s status as the first call for unique opportunities.
“Berkshire has been set up to be countercyclical, to have a war chest that can take advantage of significant dislocations in the market,” said Richard Cook, who oversees $330 million including Berkshire shares at Cook & Bynum Capital Management.
Buffett’s been here before. In his 1998 letter to investors, he lamented $15 billion in cash that was burning a hole in his pocket with “nothing on the horizon” in terms of good acquisitions or large equity bets. Months later, while dot-com companies were the rage and Berkshire’s stock was slipping, he bought a majority stake in power utility MidAmerican Energy.
That deal became the building block for the energy business that he now refers to as one of the two “redwoods” in the most valuable part of Berkshire’s forest. It also delivered the executive — Greg Abel — who many consider the front-runner to be his successor.
Buffett once again confronted a record cash pile of $43 billion at the end of 2004 after saying he “struck out” on several multibillion dollar acquisitions. That time, the level stayed relatively consistent until 2008, when financial markets fell into disarray and Berkshire went to work, lending billions to Goldman Sachs Group Inc and General Electric Co.
Now, the question for investors is how long is Buffett willing to wait to find reasonably priced opportunities. After holding onto more than $100 billion of cash since the end of 2017, he pulled the trigger on more share repurchases last year, a route he had avoided over Berkshire’s history. While he considered using buy-backs in 2000 when Berkshire’s Class A stock dipped below $45,000, he eventually delayed any move.
“Long-term, just trusting them has really proven to be the right strategy,” Paul Lountzis, president of Lountzis Asset Management which oversees more than $200 million including investments in Berkshire stock. “Very few people would have the courage as CEOs of companies to sit around and be patient like they are. He can afford to do it based on his track record.”
Some of the cash pile is set to be put to work soon. Berkshire agreed to inject $10 billion of preferred equity in Occidental Petroleum Corp. to help finance an acquisition of Anadarko Petroleum Corp., a deal that will be completed if Anadarko shareholders approve the merger later this month.
Last year, Buffett said prices for deals were too high for his liking, so he spent more than $15 billion on shares of Apple. He also bulked up on banks and airlines, but the stakes in many of those companies are now near the 10% ownership threshold that he’s said he prefers not to cross. He even passed that level with his Bank of America Corp. stake last month.
While Buffett’s preference in recent years has been to acquire operating companies, his increased stakes in big public companies have helped him trim the cash level, Lountzis said.
“If he had not done that, the amount of cash on the books would just be frightening,” Lountzis said.
Berkshire’s $400 million of buy-backs in the quarter was down from $1.7 billion in the first three months of the year. That total fell short of the $1.5 billion expected by Barclays Plc analysts. Berkshire’s board changed its buy-back policy last year as another way to deploy the mammoth cash pile, but Buffett has kept buy-backs relatively limited, only repurchasing a total of $3.4 billion since the policy tweak. JPMorgan Chase & Co., the closest financial firm to Berkshire in market value, has bought back about $20 billion in that time.
The stock market’s march higher is limiting Buffett’s opportunities, but it has pushed his stock portfolio above $200 billion in value and driven higher earnings. New accounting rules cause unrealised gains to be included in profit, so the company’s $7.9 billion in investment gains drove net income to a 17% jump.
There are other tangible benefits to the company of higher markets, beyond the gains on its stock portfolio. Berkshire had almost $1 billion in gains in the first half of 2019 on put options it wrote on several equity indexes more than a decade ago, almost half of which expire this year.
Still, investors aren’t rewarding Berkshire for its stock bets paying off. While the S&P 500 has surged 17% this year, Berkshire’s Class A shares are exactly unchanged.