What’s Berkshire going to do with all that cash?

Greggory Warren, CFA 28 March, 2019 | 2:00PM

With investment opportunities few and far between these days, Berkshire Hathaway (BRK.A)/(BRK.B) faces a near- to medium-term issue: large cash balances that (absent any sizable deals) will need to be returned to shareholders. While Buffett has been clear about share repurchases being his preferred option (relative to dividends) for reducing excess cash balances (not dedicated to acquisitions or stock investments) down the road, we expect him to be just as cost-conscious when buying back shares as he has been with other investments historically. As long as Berkshire’s shares trade closer to the five-year average multiple of 1.45 times book value per share, we think repurchases are unlikely.

Financial strength is a competitive advantage

Berkshire’s strong balance sheet and liquidity are among its most enduring competitive advantages. The company’s insurance operations are well capitalized and highly liquid, carrying greater levels of equity and cash relative to other insurers, which should help to offset potential losses. Berkshire generates large amounts of free cash flow from its operations and maintains significant levels of cash and equivalents on its balance sheet, which amounted to $103.6 billion at the end of the third quarter of 2018.

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About Author

Greggory Warren, CFA

Greggory Warren, CFA  Greggory Warren, CFA, is a financial services sector strategist for Morningstar.

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