Berkshire’s cash hoard has reached a new all-time high, and there are some good reasons for it.
Berkshire Hathaway (BRK.A 0.41%) (BRK.B 0.30%) recently released its first-quarter earnings, and we learned that the company’s cash stockpile has grown to nearly $189 billion, which is by far the most it’s ever had.
Many investors, including Berkshire CEO Warren Buffett, would love to find an attractive way to invest that capital, but the conglomerate has had no such luck. And maybe investors should be patient, as a large amount of cash is a more attractive asset than it was a few years ago.
With that in mind, Berkshire’s cash has swelled to an all-time high for some good reasons. Here are three that investors should be aware of.
Berkshire made a big investment sale in the first quarter
First off, Berkshire generated quite a bit of cash in the first quarter. In addition to about $11.2 billion in operating earnings from its businesses, Berkshire also sold about 13% of its massive investment in Apple (AAPL 0.38%), likely resulting in nearly $20 billion for Berkshire.
It’s worth noting that Berkshire sold some Apple stock not because Warren Buffett’s opinion on the business is changing, but for tax purposes. In the annual meeting, Buffett implied that the decision to sell some Apple was made in anticipation of higher tax rates in the future. (Selling locks in today’s rates.) This sale will still result in a substantial tax bill for Berkshire, but it still adds significant cash to the company’s bank accounts.
Although it wasn’t quite as large, it’s also worth noting that Berkshire sold its entire stake in Paramount (PARA -3.01%), which likely brought in around $800 million. This investment was sold at a loss and could help offset the tax burden from the Apple sale.
Buffett hasn’t seen many great opportunities
In recent years, Buffett has discussed the lack of attractive investment opportunities several times. Business valuations have been generally high, and Berkshire has grown so large that it would need to make a big acquisition to really move the needle and put a dent in its cash hoard.
As Buffett said at the recent annual meeting, “We only swing at pitches we like.” And Berkshire clearly hasn’t seen many of them lately.
The cash is making money
Another big reason Buffett isn’t in any big hurry to deploy Berkshire’s capital is the rising interest rate environment. Of the cash on Berkshire’s balance sheet, $153.4 billion is invested in short-term U.S. Treasury bills, which Buffett said were yielding about 5.4%. The other $35 billion is probably earning some interest as well — it isn’t simply a room full of physical cash.
This means that Berkshire is making at least $8.3 billion in annual income from its cash. While this isn’t exactly a stellar yield, it is certainly a significant amount of income. It wasn’t too long ago that short-term Treasuries were paying near-zero interest rates, so its cash has essentially become a new source of income for Berkshire.
To be clear, the high-rate environment isn’t the only reason Berkshire has built such a massive cash position. At the Berkshire meeting, Buffett said: “We don’t use it now at 5.4%, but we wouldn’t use it if it was at 1%. Don’t tell the Federal Reserve.” But it’s fair to say that being able to earn billions in annual income on the cash stockpile doesn’t exactly give Buffett a big sense of urgency to deploy this capital.
Matt Frankel has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
