Berkshire Hathaway is sitting on $150 billion of hard cash

11 Aug 2023 , 09:38 AM

When Berkshire Hathaway announced its quarterly earning for the June 2023 quarter, what struck analysts and investors alike was the massive stash of $150 billion that it was carrying in its balance sheet. For the records, Berkshire Hathaway is the investment vehicle of the legendary Warren Buffett and has been one of the greatest performing portfolios in history and the company is also among the ten most valuable companies in the world in terms of market capitalization. 

The earnings numbers of Berkshire Hathaway were also quite flattering for the company. For the June quarter, Berkshire Hathaway reported net income of $35.91 billion, compared with a net loss of ($43.62) billion in the corresponding period last year. What also stands out in the latest quarter is that Berkshire Hathaway is sitting on a cash pile of $147.38 billion and closing in rapidly on $150 billion. More importantly, it has grown nearly 13% on a sequential basis compared to the first quarter of 2023. 

Quick take on the earnings announced by Berkshire Hathaway in Q2

For the June 2023 quarter, Berkshire Hathaway reported net profits of $35.91 billion of which nearly $10.04 billion came from core operating earnings. The balance came from the investment portfolio of Berkshire Hathaway, which includes some marquee companies like Apple Inc, Occidental Petroleum, Bank of America, American Express, Coca Cola and many more such long term wealth creators. But, let us get back to their operating earnings. For Berkshire Hathaway, the operating earnings come from their active investments in businesses like insurance, railroads (SNCF) and utilities. These operating businesses generated net income of $10.04 billion in the June 2023 quarter, which is 6.6% higher on a yoy basis.

The overall net income of $35.91 billion for the June 2023 quarter compares very favourably with the net loss of $43.62 billion in June 2022 quarter. However, it must be remembered that the profits and losses are marked to market and then reported. So, while it may give a clear short term picture of the portfolio, it may not be a very appropriate picture of the long term wealth creation by the portfolio of Berkshire Hathaway. One of the biggest contributors in this quarter was the $26 billion unrealized gain from its investments in Apple Inc, which remains the biggest holding of Berkshire Hathaway. Apple recently touched a market cap of $3 trillion and gained 18% in the June 2023 quarter, taking the value of Berkshire Hathaway’s holdings in Apple Inc to a whopping $178 billion.

 

How did the cash stash come to $150 billion?

One question that analysts are asking is about why Buffett is sitting on such a large hoard of cash in treasuries and low risk investments rather than deploying it in equity. After all, Buffett is considered the savviest value investor of all time. However, Buffett has been consistent in his view that there were not enough compelling opportunities in equities at the current juncture. That has forced Berkshire Hathaway to take a backseat and stay put in treasuries, rather than venturing into risky equities at expensive valuations. For Buffett, the underlying methodology of investing in equities has always been about margin of safety and as long as the margin of safety was missing in the equity story, he is less than convinced.

Normally, Buffett has preferred to use his cash stash to buyback the shares of Berkshire Hathaway. He calls that the best way to reward shareholders with a greater stake in the company they have been so loyal to. However, if you look at the June 2023 quarter, share buybacks by Berkshire Hathaway were just about $1.4 billion, compared to $4.4 billion in the first quarter. One reason could be the sharp rally in the stock price of Berkshire Hathaway, which makes it less lucrative to buyback the shares and that could explain the lower buyback levels. For instance, the Class-A shares of Berkshire Hathaway are currently trading at an all-time record high of $541,000 per share compared to the previous all-time high touched in March 2022 at $539,180. That has been a reason for tepid buybacks. A mix of limited equity investment opportunities and reduced buyback has resulted in record cash stash at Berkshire Hathaway.

Dissecting the Berkshire Hathaway numbers

A closer look into the different operating segments for the June 2023 quarter shows weaker results compared to 2022, in all the businesses other than the core insurance business. However, the traction in the insurance business led to overall operating income growing by 7% in the June 2023 quarter on a yoy basis. In 2023, it is the insurance segment that has been the growth driver as operating income increased by 9%. The operating income, excluding insurance, actually contracted by 8%. How did insurance manage such good numbers? It is largely thanks to the higher interest rates in the US economy, where the Fed has already hiked Fed rates by 525 basis points since March 2022. The higher interest yields resulted in a 24% spike in investment income, which helped the insurance business post very attractive numbers. Here are some highlights of the operating businesses.

• The insurance business got a boost from the low cost of float and the enhanced gap between float cost and investment income. Float per share has been on the way up.

   

• Earnings from its Burlington Santa Fe Railroad business fell due to lower overall freight volumes while profits were impacted by higher non-fuel operating costs.

   

• In the BHE energy business, the lower profits were caused by higher provisioning due to the 2020 wildfires that hit operations. Transaction volumes were also lower.

Let us not turn to how the investment portfolio performed.

Berkshire Hathaway investment portfolio

In the Berkshire Hathaway portfolio, there are some substantial stakes held by the investor where the profits of the company are recognized by the equity method of accounting due to the size of ownership and influence on management. Such companies in the portfolio include Kraft Heinz, Occidental Petroleum and Berkadia. Berkshire Hathaway is the single largest shareholder in Occidental Petroleum with 25.3% stake. In terms of outlays, its buyback fell to $1.4 billion the second quarter compared to $4.45 billion in Q1.

There were other investment trades too in the quarter, which can be summarized as under.

• Berkshire Hathaway was a net seller to the tune of $8 billion in publicly traded equities. It sold close to $1.4 billion of Chevron while adding to its stake in Occidental petroleum in the latest quarter. It continues to be selective on oil.

   

• It may be recollected that in August 2020, Berkshire Hathaway had bought 5% stake in five Japanese trading companies viz. Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui, and Sumitomo Corp. In the June 2023 quarter, Berkshire increased its stake in these 5 trading companies from 5% to nearly 7.4%, and may take it to 9%. 

   

• However, the biggest boost to the net income came from the 18% rally in Apple Inc, which is the largest stock in the Berkshire Hathaway portfolio. Buffett may have been a late convert to technology, but he has surely made the best of the Apple story.

Both Buffett and Munger have held the view that investment gains and losses reported on MTM basis each quarter were more for compliance and had little relevance from a longer term perspective for the portfolio. However, what really matters is that the earnings from the operating businesses are up 64% from the pre-pandemic levels. That is surely something for Berkshire to celebrate.