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Buffett Cashed Up and Happy to Stay So

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2023-05-14

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As we have observed in the past, Warren Buffett is all about cash, a lot of it and its clever, profitable deployment over time.

Right now, he’s locked in a guaranteed $US5 billion stream of cash this year coming from his fabled cash pile, the massive share portfolio and various other near cash investments.

That $US5 billion estimate - his, by the way at last weekend’s annual meeting in Omaha, Nebraska - is up from just $US50 million in late 2020 when interest rates were at zero and many companies and banks had suspended or cut dividends in the face of the pandemic and its slew of unknowns.

And that’s also in addition to the billions of dollars in normal revenues and income that will flow from the day-to-day performance of the more than 90 companies in the empire.

And that $US5 billion stream also shows you that for every doom and gloom story about high interest rates and high government debt, there are always winners - the holders of the debt - and Buffett and Berkshire are among the biggest.

Shares are an attractive destination for Buffett’s cash at most times, but right now he seems to have decided that the attraction has waned a bit - Berkshire has sold more shares than it has brought for the past two quarters.

So it's cash and US Treasuries - especially the latter at the moment as the world’s most famous investor prepares his company for what could be a big shakeout if the US and other economies hit the wall later this year.

Many analysts, investors and rivals decry Buffett’s cash pile and claim it depresses Berkshire’s performance - it certainly did in pandemic riddled 2020 and 2021 when interest rates fell to record lows of zero to 0.15% for the US.

But the pandemic depressed the returns of a lot of companies and investors, while sparking profits and revenue for others - in online retailing for example.

Last year’s surge in rates saw bond prices slump as yields soared, triggering high losses, especially US regional banks and helped bring on the regional bank crisis and the collapse of three of the four banks to fail this year, especially Silicon Valley Bank.

But over the years Buffett and his investment managers have deployed the cash pretty efficiently, investing in companies like Apple and businesses like smaller insurer, Alleghany Corp which was bought last year for $US11.6 billion and brought with it more than $US20 billion in cash and securities.

That helped Berkshire topped up its cash pile, ending the quarter with $US130.6 billion, after finishing last year with $128.6 billion of cash on hand.

And that led to the most telling statement at the annual meeting last Saturday which wasn’t about the health of US banks, investment in Japan or the warning about weakening earnings from some of the company’s 90 businesses over the rest of this year, but this:

“Our investment income is going to be a lot larger this year than last year, and that’s built in,” Buffett told the annual meeting.

Investment income rose from $US1.1 billion a year ago to $US1.9 billion for the three months to March. That’s money generated from its investment portfolio (dividends from companies like Apple, Coca Cola, Bank of America and Amex) and interest from cash pile’s huge holdings of US Treasury securities.

"Interest and other investment income increased $977 million in the first quarter of 2023 compared to the same period in 2022,” Berkshire said in the first quarter report.

"The increase was primarily due to increases in short-term interest rates. We continue to hold substantial balances of cash, cash equivalents and short-term U.S. Treasury Bills. We continue to believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments.”

In this case safety (US Treasuries) and yield (10 rate rises from the Fed) are coinciding profitably for Buffett’s company.

Buffett told the annual meeting that Berkshire keeps its cash pile “in Treasuries” and near liquid securities.

 Berkshire said in its first quarter reports "our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $127.7 billion, which included $106.9 billion in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investments in Kraft Heinz and Occidental common stock) were $350.7 billion.”

Some context about that holding - according to US Treasury data, as at the end of January this year, Berkshire’s $US106.9 billion holding of Treasuries was larger than Germany’s at $US91.3 billion, Norway’s $US104 billion, and South Korea’s $US105 billion (and 18 other countries). It was also almost twice Australia’s $US62 billion.

The cash pile is both investment firepower and a source of stability that gives Berkshire the muscle to take advantage of opportunities if the economy tanks. But it will also be a handy profit centre and offset for the lower earnings from some parts of the empire.

All up $US487 billion of Berkshire’s $US997 billion in total assets is in cash, bonds or equities - in other words nearly 49% of Berkshire’s assets is cash of varying forms.

And, by the way, judging by the way the value of Berkshire’s businesses is growing, it will soon achieve another rare distinction - become one of the few non-financial companies to have a $US1 trillion or more in assets. The $US997 billion was up from $948 billion at December 31 last year.

Apple, the world’s biggest company by market value, only had $US343 billion in total assets at the end of March (including $US51.3 billion in cash and securities).

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The March quarterly report contains a breakdown of the assets acquired in the Alleghany deal - it should make sad reading for rivals and those critics - Berkshire essentially paid for the deal in the $US15 billion in cash it got in the takeover - the five billion dollars and a bit more was simply cream on top.

That cash went into the float and the cash pile and Alleghany’s 300,000 plus holding of Apple shares were tucked away in Berkshire’s investment portfolio.

The company was a net seller of equities in the quarter (for a second quarter in a row), pocketing $US10.4 billion from stock sales after deducting purchases. Seeing Berkshire sold nearly $US15 billion of shares on a net basis in the December quarter of last year, meaning Buffett’s company has now sold $US25 billion of shares on a net basis in the past six months.

It spent another $US8.2 billion buying 38% of the Pilot Flying J truck stop retail and service centre business. Berkshire has paid more than $US11 billion all told for that 80% stake in two tranches in 2017 and this year. Pilot was the 5th largest private company in the US when Berkshire first bought in back in 2017.

But all told Berkshire bought $US68 billion in shares in 2022 ($34 billion on a net basis) did the Alleghany deal and bought back $US7.9 billion in shares.

 The holding in Chevron fell 28% in the first quarter, from around $30 billion value to $US21 billion and that looks very much like the sale of between 30 and 35 million shares in the quarter. Chevron’s share price only fell 9% in the first three months of the year.

We will know next week when the March quarter major fund manager report to the US Securities and Exchange Commission is released.

The surge in Apple shares in the quarter boosted statutory earnings to $US35.5 billion in the quarter. Berkshire’s 5.6% of Apple rose sharply in the first three months of the year to $US151 billion (and $US154 billion at May 5) from $US119 billion at the end of 2022.

Berkshire often recommends that investors look past investment gains, which are tied to accounting rules accounting for realised and unrealised gains and losses, and can be misleading to investors.

Apple’s gain helped offset falls in the shares of other stocks in Berkshire’s core holdings - Apple, Bank of America, Chevron, Coca Cola and Amex. It also helped cloak the sale of some of the Chevron holding.

Shares in Bank of America fell 13.7% in the quarter to $US29.5 billion, Amex shares lost 10% to $US22.4 billion and shares in Coca Cola were down around 4% to a value of $24.8 billion.

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