Yahoo Finance Warren Buffett's $137 Billion Question
Warren Buffett (Trades, Portfolio) is arguably the greatest value investor in history. Over the course of nearly six decades, he has turned Berkshire Hathaway (BRK.A) (BRK.B) into a veritable cash-printing machine. As of the end of the first quarter, the sprawling conglomerate is sitting on an astonishing $137 billion in cash.
Buffett cannot sit on Berkshire's bulging bank balance forever, as investors have grown increasingly vocal about the need to put some cash to work. Thankfully, Buffett has a number of options.
Acquire businesses
Buffett's first option is to make deals and buy great businesses at attractive prices. Investors have long thought of Berkshire's vast cash reserve as a valuable resource to be deployed in a time of crisis. However, as I explained last week, the federal government's overwhelming generosity in the face of the current downturn has severely constrained Buffett's ability to make favorable private deals with struggling businesses.
Moreover, the numerous variables and question marks surrounding the long-term impacts of the Covid-19 pandemic appear to have made Buffett reticent to take bold action, even if it were possible. According to Charlie Munger (Trades, Portfolio), Buffett's long-time business partner, on April 17, conservatism is the order of the day at Berkshire: "We just want to get through the typhoon, and we'd rather come out of it with a whole lot of liquidity."
According to Munger, the extreme levels of uncertainty created by the coronavirus have made Berkshire more cautious, while many companies seem "frozen" by the economic disruption.
Buy more stocks
With Berkshire crowded out of the financial rescue game at present, Buffett's long-standing hope of making another "elephant-sized" acquisition seems less likely to come to fruition than it did pre-crisis. However, in the event of a prolonged recession, a multitude of struggling but otherwise attractive companies may end up on the auction block. Whether any such deal could entice the cautious Oracle of Omaha is less clear.
In the meantime, another option Buffett might consider is to further expand Berkshire's massive stock portfolio. This option does not seem likely, given the company's latest activities. In the first quarter, Berkshire bought $1.8 billion worth of stock. Given that virtually all of the company's staggering $49.75 billion loss for the first quarter was attributable to the big hit to its equities portfolio when the market swooned in March, Berkshire's lack of appetite for stocks is understandable. The surge in stocks over the past two months, despite the real economy continuing to suffer, is unlikely to whet Buffett's appetite any further.
Return cash to shareholders
If neither stocks nor whole businesses can entice Buffett, he may consider giving cash back to Berkshire's shareholders. After all, the company's operating business has continued to chug along at a fine pace despite the crisis. First-quarter operating profit rose 6% to $5.87 billion. Berkshire's official net loss was the result of the $54.5 billion hit to its public investment portfolio.
With Berkshire's operating business still holding up, Buffett may consider returning cash to shareholders. However, given the Oracle of Omaha's well-known antipathy toward dividends, such a return would likely come indirectly via share buybacks. This has been a popular method of Berkshire's for deploying excess cash in the absence of any attractive external deals.
However, Buffett has proven conservative thus far on this front as well. In the first quarter, Berkshire bought back just $1.7 billion worth of shares, down from $2.2 billion in the previous quarter. This pullback perplexed many analysts, commentators and asset managers. As John Huber of Saber Capital Management observed on June 11, Buffett's decision to stop buying shares in March was quite unusual:
"He stopped buying back shares in March, which was really surprising because he has always said that he's always sort of benchmark intrinsic value somewhat to book. So he's always sort of tethered his estimate of intrinsic value to book value in some way...what I guess is unique about this particular time is he was buying shares in January and February at 1.3 times book and then he stopped buying at a level that got as low as I think 1.15 or so, by my estimates."
Wait and see
Buffett may ultimately decide that no cash deployment option is particularly attractive, in which case Berkshire may continue to sit on its ever-growing hoard. According to Huber, Buffett's caution is a rational response to present circumstances:
"I think Berkshire is extremely cheap, but I think Buffett is cautious because I think he doesn't want to see the boat that he spent 50 years building, start to develop holes when he's 90 years old."
In my view, continuing to keep its cash on hand is a likely near-term strategy for Berkshire to pursue given its pullback from buybacks, an arguably overheated stock market and a dearth of attractive large-scale deals.
Playing it safe is a reasonable course of action for Buffett to take, given the almost unprecedented level of financial, economic and political uncertainty now at play in the market.
My verdict
A diversified, cash-flush business with a strong operating core may be one of the safest options investors can expect to find in these uncertain times. Buffett has lots of options and Berkshire's investors remain in safe hands.
In my view, Berkshire looks increasingly like a bargain amidst market turmoil.
Disclosure: No positions.
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This article first appeared on GuruFocus.
