Even though income investing is the dominant theme of this site—it’s on the masthead, after all—there are times when it can be wise to look beyond dividend stocks, particularly if the company whose purchase is contemplated: (1) is achieving high internal rates of return, (2) is trading at a reasonable valuation, and/or (3) gives you something special that you can’t otherwise get through dividend stocks alone.
In the case of Berkshire Hathaway, the story has always been that Warren Buffett is the capital allocator, and that proved to be the reason why you’d see dividend investors have a stock portfolio of all the usual suspects, oh, and Berkshire Hathaway in an account somewhere.
Now, there’s another reason: Berkshire Hathaway is sitting on an enormous amount of cash that will rapidly increase earnings per share when he makes his next acquisition. As of today, Berkshire’s cash load is at $55 billion. Short of Apple before it started paying a dividend, or Microsoft before it started paying a dividend, no other examples immediately come to mind of a company sitting on so much deployable cash.
For comparison, the market capitalization of Colgate-Palmolive, a popular stock around here, is $58 billion. In about a month and a half, Buffett would have the cash on hand to buy the company outright (note: this wouldn’t actually happen because Berkshire likes to keep $15-$20 billion on hand to guard against unusually high insurance claims occurring during a period of economic declines, and in order to take over a company like Colgate-Palmolive, you’d almost certainly have to pay a premium of 30-40% above today’s already somewhat lofty market prices).
If I had to speculate on what will happen, Buffett will sit on the cash until the next mild correction (say, 15% or more broadly across most companies) occurs before you look to see him make a move that parallels the size of the Heinz acquisition (on the other hand, he only needs to find one asset in the world to buy at a time, and perhaps he could find a good deal in the $15-$25 billion range out there).
Either way, there’s a lot of things coming together that suggest Berkshire will be immensely more profitable years from now. You have large holdings like Wells Fargo raising its dividend payout ratio, you have holdings like IBM and Exxon that are likely to have 10% or higher dividend growth rates over the medium term, you have operating companies like Clayton Homes and Nebraska Furniture Mart and GEICO that are set for record profits, and you have those 700,000,000 Bank of America shares that will hit Berkshire’s balance sheet before 2021. And then there’s the inevitable deployment of at least $30 billion of that current $55 billion cash load that is growing by $1-$2 billion each month.
It seems to me that $55 billion is being left out of most analysis of Berkshire. People just spend their time talking about when Buffett will no longer be running it, choosing to ignore all the embedded decisions that Buffett is making to secure Berkshire Hathaway as the pre-eminent long-term investment after he is gone.
Originally posted 2014-08-04 12:55:47.