A Money Printing Machine That Generates $69.8 Mil A Day

image credit to dreamstime.com

In my last blog post, I talked about “The Power of Free Cash Flow”, the importance of having consistent and sustainable free cash flow for companies which would allow them to pay a dividend or buying back their own shares. Imagine if there is a company that could generate $68 MIL a day, do you think such company exist in world stock market ?

Yes! It's Berkshire Hathaway (BRK ) and it was sitting on a massive cash pile at the end of 2018 and the cash continues to increase quarter by quarter in billions of dollar.  BRK is sitting with a gigantic cash amount of USD 114 Billion as of 1^st Quarter 2019.

For the past 3 years, Berkshire was able to generate Free Cash Flow of USD 25.5 Bil /year (on average) and this will translate to about USD 69.8 Million / Day.

Despite spending close to USD127.5 Billion on an acquisition of various companies since 2009, the cash pile continues to increase year by year.

I try to plot the cash ratio for BRK by using the data from its’ annual report.

** Sudden spike of cash ratio in 1985 was due to cash increased of close to USD900 Mil because of the buy-out of General Food by Philip Morris.

The Cash Ratio for Berkshire Hathaway (BRK) has increased to above >30% in recent years, a level never be seen prior to 2008/09 (GFC) where BRK’s cash ratio hit 40% at that time.

Some analysts argued that such huge cash pile has dragged the performance of BERK in recent years, but with the size of the amount they need to spend on any purchase, is hard for BRK to find the right company and also the valuation seems high for Warren’s standard as he likes to buy a company with a good bargain and high “margin of safety”.

 

Warren Buffett wants to make an ‘elephant-sized’ purchase but says ‘prices are sky-high’ < CNBC.com>

“Warren Buffett says he wants to spend Berkshire Hathaway Inc.’s growing pile of cash on a giant acquisition, but he doesn’t see that happening anytime soon. 

“Prices are sky-high for businesses possessing decent long-term prospects,” Buffett wrote in his annual letter to investors, adding that will lead to buying more public stocks in 2019. “We continue, nevertheless, to hope for an elephant-sized acquisition.” 

Berkshire’s cash pile rose to $112 billion, showing how hard it’ been for Buffett to put money to work as fast as Berkshire accumulates it. The legendary investor made his name by consistently outpacing the broader market, but that’s become harder as Berkshire has grown. While the company’s book value has increased at almost twice the rate of the S&P during his career, it has actually trailed the index over the last decade. “

BRK vs SP500 For Past Decade <msn.com>

image credit to Bloomberg.com

“The cash has been a drag on Berkshire’s ability to return more than the broader market. While the company’s book value has increased at almost twice the rate of the S&P 500 during his career, it has actually trailed the index over the last decade. Buffett said he’d be retiring the metric from his annual letter because it has lost relevance.”

Warren Buffett has just about given up on beating the S&P 500 <marketwatch.com>

So the “share buy-back” is another option for BRK to make use of their cash to increase shareholder’s value.

Berkshire Hathaway ramps up stock buybacks as cash pile keeps growing

<TheHinduBusinessLine.com>

Why Doesn't Berkshire Hathaway Pay a Dividend? (BRK-A, BRK-B) < Investopedia.com>

“Berkshire Hathaway (BRK-A, BRK-B) does not pay a dividend because its chairman and CEO, Warren Buffett, believes it is more beneficial to allocate the company's earnings in other ways. In particular, Buffett prefers to reinvest profits in things that allow his company to improve its efficiency, expand its reach, create new products and services as well as improve existing ones, and further separate itself from competitors. Buffett, like many business leaders, feels that investing back into his business provides more long-term value to shareholders than paying them directly because the company's financial success rewards shareholders with higher stock values. While the company does not pay a dividend, it does, however, have a prudent stock buyback policy that works to put cash directly into shareholders' pockets. “

Although to some analysts, Warren Buffett might have seen not effectively capitalize the huge cash pile BRK had in hand, hence resulted in BRK’s under-performing S&P 500 in the past decade, but guess who will be the “winner” when the crisis hit and eventually everything will be on “fire sales“ by that time. Also, it might not be easy for him to look for “elephant-sized “ kind of acquisition with a great bargain at this moment. Again, only time will tell who will be the real winner and who knows, being patient may reward Warren handsomely in the near future.

Remember what he said before:

image credit to pinterest.se

Ultimately, one will need to ask yourself,” Are those companies you have invested generating enough “free cash flow” to either pay you a decent dividend or arranging share buy-back to enhance total shareholder’s value?”

Cheers!

Quote of The Day :

“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.” – George Soros