Editor’s Note: Trip Miller, managing partner of hedge fund Gullane Capital Partners, is a Berkshire Hathaway shareholder. The opinions expressed in this commentary are his own.
Warren Buffett is perhaps the finest investor of the past century. Berkshire Hathaway has handily outpaced the returns for the S&P 500 since he took over. However, when it comes to Buffett’s capital allocation decisions over the past decade, as well as Berkshire’s ballooning cash balance, there is certainly room for improvement. Simply put, the company has far too much cash and too few options to effectively deploy it.
Certainly, being armed with nearly $112 billion in cash is quite a luxury. Shareholders can agree that while this cash is a wonderful “problem” to have, it has been a drag on investment portfolio performance over the last decade, and perhaps a sign that Buffett needs to pull the trigger on a big acquisition or some other deals to spur growth. Berkshire has not completed a large transaction since purchasing Precision Castparts for $37 billion in 2015.
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In his annual letter to shareholders, Buffett said Berkshire wants to buy another business — an “elephant-sized acquisition” — but that valuations are currently “sky high” for companies with good long-term prospects. Roughly 100 publicly traded companies around the globe now have market caps of more than $100 billion. Unless the markets see a significant correction and bring valuations back down to earth, Berkshire likely won’t make any big acquisitions. Not only that, but its operating cash flow will continue to accrue and compound the problem.
So what should Berkshire do with this mounting stockpile of cash?
Buffett has adamantly said no to paying dividends due to the tax consequences. Assuming a 25% average income tax rate for a Berkshire investor, he seems to make a fair argument that has served investors well over time. But Berkshire’s underperformance over the past 15 years brings that wisdom into question. A special dividend of, say $25 billion, which is about 5% of the company’s current market cap, would allow investors to allocate capital to investments that can make more than the 2% or so in interest Berkshire is making with the cash.
Additionally, a special dividend would flow into the economy or investors’ favorite charities. So, in other words, all this cash that’s sitting at Berkshire is currently doing very little for investors, the country or society.
Restructure the portfolio
Berkshire has traditionally stayed away from tech companies, and has been late to the game in investing in businesses like Amazon and Apple. Berkshire investors are now left with an odd mix of tech companies that shareholders seem divided on, and legacy investments like Coca-Cola, Wells Fargo and Kraft Heinz that will struggle to grow at compelling rates in future years, or were outright overpriced mistakes (in the case of Kraft Heinz).
The size of the cash portfolio certainly creates its own group of challenges. Mostly, it limits the companies that would qualify for an investment based on market cap. But it’s in Berkshire’s best interest to find value plays beyond its current comfort zone. It should invest in a broader scope of geographies and industries, especially tech. Even if it’s later and pricier than we would have liked, investing in Apple and Amazon are steps in the right direction.
Buy back more stock
Assuming dividends are off the table for now and major acquisitions are difficult to find, there is one option Buffett seems agreeable to. Berkshire should buy back billions of dollars of stock instead of the tiny chunks we have seen on a few occasions over the last decade. During the annual meeting, Charlie Munger said the company would become “more liberal” with buybacks in the near future. Buybacks reward long-term investors, are tax effective and send a signal to potential investors to come join our compelling capitalistic party.
While shareholders can all applaud Buffett’s discipline in pricey markets, anything is better than making less than 2% on a cash balance. Returning capital to shareholders via a dividend, restructuring the portfolio or buying back shares would offer shareholders a significantly better alternative while leaving Buffett’s prized elephant gun fully loaded for hunting once the timing is right.