The purpose of an insurance company is to provide a capital backstop against disaster. When your car crashes, your house burns down or a hurricane hits your city, you depend on insurance to get you back on your feet.
So, what does it mean that Berkshire is sitting on $128 billion in cash? Subtracting out that cash, Berkshire Hathaway stock now sells for a market capitalization of $407 billion, against expected 2019 revenue of $295 billion.
Payments Flashing Green
Every economic and political indicator today is flashing red, signaling that engines are overheating and we’re heading into a political crisis.
While Buffett is now 89, he still prides himself on looking over the hill, past a crisis, to the next opportunity. After decades claiming he didn’t understand tech, he’s now big on Apple (NASDAQ:AAPL), Visa (NYSE:V), MasterCard (NYSE:MA) and StoneCo (NASDAQ:STNE), a Brazilian payments company.
It’s like something my wife told me when she took her present job, 36 years ago. “I like working on programs that make money,” she said. It may be just pennies, or even fractions of a penny, per transaction, but it adds up. Of all the niches software has entered in this decade, it’s payments that have paid off best. Visa alone is valued almost equally to JPMorgan Chase (NYSE:JPM), the biggest bank in the U.S.
Of Berkshire’s five largest holdings, four were in the payment space. Apple, Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC) and American Express (NYSE:AXP) represented almost 70% of Berkshire’s portfolio.
Berkshire’s Essentials Look Good
The exception to that list was Coca-Cola (NYSE:KO).
What’s Coke doing on the list? Critics claim it’s a sugar water company. In fact, for a century it’s been a water purification company. It has been since Robert Woodruff became CEO in 1923, and challenged managers to make every Coca-Cola product taste alike, no matter where it was bottled.
Buffett has always been interested in distressed assets. A lot of attention has lately been paid to his purchases of Occidental Petroleum (NYSE:OXY) and RH (NYSE:RH), the former Restoration Hardware. Occidental is at a 10-year low and its dividend yielding 8.4% is currently backed by earnings. RH stock has been on fire the last six months, nearly doubling in value.
Cash is King
Berkshire Hathaway is an enormous property insurance operation, with nine units covering houses, cars, commercial property and personal liability. In good times these operations throw off enormous profits. In hard times the country depends on them.
Climate change means there are hard times ahead. California is burning. Florida is drowning. Hurricanes are getting worse. The brakes are off global politics, in the war of all against all. None of this is a secret.
Berkshire isn’t alone in having more cash than it can invest. Microsoft (NASDAQ:MSFT), Apple and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) also have cash piles in excess of $100 billion. Cloud companies and insurance providers have something in common.
The Bottom Line on Berkshire Hathaway Stock
When push comes to shove, cash is king. Warren Buffett knows that. All insurers know this.
But there’s a lesson here for all of us. Keep your powder dry and be ready for anything.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, AAPL and MSFT.