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Tuesday, May 2, 2017

berkshire hathaway: return of cash

In July 2016, I noted that Berkshire Hathaway is a decent business that is not going to let its investors down, and yet it will also not be a market-beating investment. It is worth more than $400 b now, and sitting on a cash of over $85 b.

And it is its cash that is letting it down. Each quarter while the stash gets bigger, there aren't much avenues for its use. You cannot expect treasury returns on them forever; that would be an injustice to the shareholders. It's time now, probably, for Berkshire to consider the opportunity costs of its shareholders rather than its own. 

Berkshire has done very well in the past 5 years. 


As of May 2017, Berkshire stock has beaten both the Dow and S&P-500 by a decent margin. That's not the problem now though. As investors, we look at future rather than past. Quite naturally, we are interested in Berkshire's future returns.

Berkshire cannot sit on cash forever. Its operating businesses need far less cash for reinvestment than they throw out. Assuming that there are no further acquisitions, there seems to be an urgent need to return cash back to its shareholders. Even after allocating some cash for acquisitions, it is more rational to return cash than to keep in treasuries. 

The shareholders will have far better investment opportunities in the present environment than Berkshire for at least two reasons: Berkshire has grown too big such that its acquisition size has to be gigantic to make any meaningful return. Investment choices in marketable securities meeting both size and return criteria are rare; it would shake up the market prices. Opportunity costs of the individual shareholders are much higher. Therefore, cash in the hands of shareholders has much more value than in Berkshire's custody.  

Cash can be returned by way of either dividends or share buybacks. This is the single most important task in the hands of Berkshire; yet considering the towering brand of its two capital allocators, no one is brave enough to even talk about it. 

Let's allocate $10 b each to its two younger investment managers, Todd Combs and Ted Weschler. Let's keep $20 b in treasuries that is required for a good night's sleep for Buffett and Munger. That leaves Berkshire a one-time free cash of more than $45 b to give back to its shareholders. Each year, there will be free cash available to return based on an approved (significantly higher) payout ratio.

And return it must, in spite of its historical track record, and despite its iconic managers. We all have to appreciate that when facts change, we got to change our mind.

Who's going to show courage to inspire the bosses there?

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