I didn’t think it was possible for Warren Buffett and Charlie Munger to run out of ways to spend the Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) cash hoard, which shrunk to a little more than $100 billion in the first quarter, but it appears that might be the case. Berkshire stock is not what it once was.
Don’t get me wrong, I’m a big fan of Apple stock, its products, and even Tim Cook, who’s managed to grow into the job as CEO after the thankless task of following Steve Jobs in the role.
And it’s fair to say that both companies benefit from the investment: Berkshire Hathaway gets something like $700 million in dividends annually and Cook gets a ringing endorsement of his company’s stock and products.
Let’s hope this tech investment turns out better than International Business Machines (NYSE:IBM). I’m pretty sure it will, but it’s hard not to consider that possibility.
Berkshire Stock Revisited
Buffett appeared on CNBC’s Squawk Box Monday from Omaha. One of the subjects that came up in the lengthy conversation was the cash burning a hole in the company’s pocket.
If you go back over the central conversations over the past few annual meetings, you’ll notice one of the major themes is what Berkshire Hathaway intends to with its cash and will it make a big acquisition.
This year’s no different.
“If a $100 billion deal came along that [Vice Chairman Charlie Munger] and I really liked, we’d get it done,” Buffett said. “You don’t want that money to burn a hole in your pocket.”
Buffett has said this for awhile. Here’s what Buffett said in 2010:
“We will need both good performance from our current businesses and more major acquisitions,” the CEO wrote in the 2010 annual letter to shareholders. “We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”
Back then, Berkshire Hathaway’s cash and cash equivalents were $38 billion or about a third what they are today despite investing something like $12 billion in Apple in the first quarter alone.
The company’s biggest acquisition to date is Precision Castparts, which it bought in 2015 for $32.3 billion. It hasn’t made a big one in the 24 months since.
Is it possible that Buffett and Munger no longer have the appetite for a $100 billion acquisition? They’ve never come close to this kind of deal; as every day passes, the potential for the itchy finger to fall asleep increases.
What to Do?
Many investors believe that Berkshire Hathaway should initiate a dividend and raise the buyback ceiling to more than 1.2 times book.
Buffett’s got a stubborn streak, one need look no farther than Wells Fargo & Co (NYSE:WFC) to know that, so I’m confident the dividend is a nonstarter.
As for the buyback of Berkshire stock, he would have to believe the company’s options were so limited; it would be prudent to pay 1.4 times book value, its current multiple, or higher. He’s raised the limit once before, so that’s got a better chance of happening than a dividend.
I’ve suggested this idea before, but I think Berkshire Hathaway should create a second mini-Berkshire that would take about 70-80% of the cash along with the smaller operating businesses owned by Berkshire Hathaway, hire a CEO familiar to Buffett and Munger, and start building a mini version where smaller transactions would make more sense.
The point is, with a smaller business to look at opportunities that aren’t big enough for Berkshire Hathaway, shareholders of both companies would win.
Bottom Line on Berkshire Stock
Operationally, the company grew earnings by 49% in the first quarter to $5.3 billion, so it’s clear Berkshire stock is still worth owning.
And there’s no question, Apple’s also a great investment, so it’s not as if Buffett and Munger are losing their ability to spot quality earnings.
It’s just that it might be time for the M&A activities to go to a place where deals can get done.
Has it run out of ideas? I can’t answer that but what I do know is the wall keeps getting higher and higher.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.