One of the most important metrics that investors use when evaluating the merits of a company’s business success is the growth in earnings per share that a company has experienced or is expected to experience over a period of time. It’s become such an important measure, however, that it often gets gamed so that American companies avoid reporting a sudden drop in earnings. One method to accomplish that task: companies take on debt to repurchase stock and boost earnings per share to bolster the appearance of organic growth when none it exists.
The investors—read: owners—of the companies are not blameless in this regard, as we come to expect quarterly growth and hey, there are business news programs that need stories to fill up the airwaves, so a small part of the problem can be attributed to the culture that we’ve created where we expect perpetually forward motion that ignores the timeless reality of business cycles in which a company’s business results disappoint us in about three years out of every ten.
To illustrate the two extremes to which balance sheet considerations get ignored, let’s compare Anheuser-Busch against Berkshire Hathaway. Both companies are among the few dozen most profitable in the world, operate some of the most vast distribution networks and own individual brand-names that will outlive us, and have made anyone who has held either stock for any fifteen-year increment much better off than had they not done so.
I have little doubt that owners of both companies will continue to grow wealth in the coming years, decades even. But that does not mean that both shares are equally attractive. It would be much wiser, in my opinion, to initiate a position in Berkshire Hathaway today at $139 than Anheuser-Busch Inbev at $107. And you have to look beyond the mere changes in profits per share to see why.
Anheuser-Busch Inbev carries $49 billion in debt, as a result of many acquisitions, with half of that coming to fund Inbev’s takeover of Anheuser-Busch in 2008. Over $41 billion of that consists of long-term debt. No, that is not something that dooms Anheuser-Busch from being a successful investment. But, when interest rates rise and Anheuser-Busch refinances (as AT&T, IBM, and other companies with high debt loads do in the course of their ordinary business), the amount profits that will need to go towards paying off its past than driving returns for its future will grow, and this is the kind of thing that sets a company up for 5-8% annual returns rather than 8-11% annual returns—my opinion would revise upward if the debt load went down to the $20-$25 billion range, interest rates for the debt were below 5% (and presumably, Anheuser-Busch would have a higher annual profit engine by that time as well).
Berkshire Hathaway, meanwhile, is sitting on a cash load that represents enormous untapped energy. I don’t think people realize how truly enormous Berkshire is—it has over $500 billion in assets—and a market cap well over $300 billion. Heck, it’s bigger than General Electric now, as Charlie Munger recently pointed out in astonishment. And here’s the other thing: Warren Buffett is sitting on $49 billion in cash. That’s it. That’s the coiled spring, which can be turned into a permanent increase in earnings fairly quickly—think another Heinz acquisition, or something even larger.
You saw recently that Buffett is dipping his toes into auto dealerships, but I would expect that he won’t make a large move until you start to see a broad market selloff. That’s my guess, based on his and Munger’s historical style. It’s a credit to Buffett, and an underappreciated aspect of those who analyze him, how much he prepares to strike. Success isn’t just recognizing that something is cheap, but also positioning yourself to have cash on hand to do something about it.
What’s the old Mark Twain line? A man who can read and chooses not to do so has no advantage over the man who cannot read. The investment equivalent of that would be this: if you recognize that General Electric at $6, Wells Fargo at $8, Procter & Gamble at $40, Altria at $20, Aflac at $15, Coca-Cola at $20, is a deal-of-the-generation, your insight doesn’t mean anything until you transfer the cash and press the buy button. If you don’t do that, you just wasted your own intelligence. In a worst-case scenario, you lowered the ceiling of your life’s potential, as some dreams require significant capital, and you forewent an opportunity to build.
That’s what I find so wild about what Buffett is doing right now; he’s building up a cash cushion which will be turned into a significant addition to the Berkshire Hathaway earnings base at some point, and it’s not correctly priced into the stock right now. Just walk through it: Berkshire Hathaway is worth about $338 billion. It is sitting on $49 billion in cash. It is rare—outside the halls of Microsoft or Apple, which also carry tens of billions of dollars in cash, but operate in the fast-moving tech industry—to find a company carrying 14.5% of its worth in cold, hard cash.
For illustrative purposes, if Berkshire wanted to pay out its cash to shareholders—it would look like this. You’d buy a share of the stock at $139, and you would receive a one-time dividend of $20.15. That wouldn’t actually happen because Buffett likes to carry large amounts of cash on hand not only for opportunistic investments but also as a buffer against larger-than-expected catastrophes that demand insurance payouts, but the point is illustrative of the coiled spring energy that Buffett is sitting on.
People, including yours truly, get caught up in the red herrings about Berkshire—will it ever pay a dividend, will it survive after Buffett—but this often pays inadequate tribute to what he has put together at Berkshire. Berkshire is sitting on more cash than the total economic activity—not profits, not revenues, but total economic activity—conducted in St. Louis, MO over the course of the summer. The total assets are over half-a-trillion dollars. And it’s crazy to think about what Berkshire will become when Buffett deploys some of that $49 billion during the next recession, and then we check in to see what blooms out of it five years later. I would not count Berkshire Hathaway out of the running to become the world’s first trillion-dollar company.