Berkshire Hathaway (NYSE: BRK.b) is swamped with cash — rising toward $100 billion at last count. How to drain the swamp flummoxes Berkshire Chairman and CEO Warren Buffett. Allocating the Berkshire cash has become problematic.
Size is a contributor. Berkshire sports a $436 billion market cap. Investments must sop up the cash in billion-dollar increments.
Problematic, but not insurmountable. Berkshire accumulated 129.4 million Apple (NASDAQ: AAPL) shares through 2016 and early 2017. Apple shares trade at roughly 40% above Berkshire’s cost basis.
Yes, but few Apple-esque investments populate the landscape. Apple has an $820-billion market cap. Average daily trading volume exceeds 24 million shares. Apple can readily absorb a $13 billion investment and no one’s the wiser. Few other companies can say the same.
Of course, it’s more than a matter of size. Buffett and his lieutenants have to like the business and its prospects. Buffett is a notoriously picky eater.
The problem — as welcomed as the problem might be — will get worse. Nearly all of Berkshire’s publicly traded investments pay dividends. Of the dividend payers, most are dividend growers.
Berkshire will receive $326 million in annual dividends from Apple, $280 million from Wells Fargo (NYSE: WFC), $592 million from Coca-Cola (NYSE: KO). Berkshire’s largest holding, Kraft Heinz (NASDAQ: KHC), will pay it a whopping $807 million in annual dividends.
The infusion is $2 billion from those four stocks alone. The amounts will only rise. All four are dividend-growth stocks.
Privately, Buffett may luxuriate in his problem (I would). But it’s still a problem.
If the only options are to chase what everyone else is chasing, the risk of overpaying and under-performing rises. Buffett failures are few and far in between, but they’re there. International Business Machines (NYSE: IBM) and Tesco PLC (OTC: TSCDY) are among the few.
Excess cash is a drag on investment returns. Perhaps it’s only coincidence, but as the cash account has grown, returns on equity (ROE) and assets (ROA) have shrunk.
ROE, at 9.5% in 2013, is at 7.7% for the trailing 12 months; ROA, at 8.7% in 2013, is at 7.1% for the trailing 12 months.
I see one solution to the vexing $100 billion problem: dividends.
I’ve long argued for Berkshire to pay dividends (read here and here). To call me a contrarian on the subject is to impugn the word contrarian, so I’ve been told. I don’t relish being called a crank, but what else do you do when you’re an audience of one? I’ve been called a crank.
Crankish or not, I’ve traveled this road less traveled.
Before the Berkshire “B” shares were floated, I wrote that an “A” share split was in order. A split would increase liquidity and incorporate more information. The price would more accurately reflect Berkshire’s value.
Buffett always resisted splitting the “A” shares on the grounds that he preferred a certain “type” of investor. He couched it as preferring a “permanent” class of investors with a long time horizon. I couched it as an aversion to the hoi polloi — you and me.
But as the “permanent” class becomes more transient (they died), demand arose for more liquidity.
Estate planning is simplified when parceling a portfolio reduced to $300 slices compared to one with $30,000 slices. The “B” shares offered the benefits I mentioned had Buffett split the “A” shares. (The “B” shares, issued in May 1996, shares were split 50-for-1 in 2010).
Now it’s time to pay a dividend — special or regular — like the mere-mortal companies whose shares Berkshire owns. Not all $100 billion of Berkshire cash should be paid, mind you, but $25 billion is a good start.
No one suffers under the dividend scenario.
Cash will always be available in case a mega-deal pops up to Buffett like a jack-in-the-box. Berkshire will always have access to cheap capital with Buffett at the helm. Investors retain their proportional ownership, but now they have the cash to buy that $300 million market cap growth stock Berkshire couldn’t possibly buy.
All companies are valued based on the present value of future cash flows. The future has finally arrived. Berkshire Hathaway has no choice but to pay dividends.