Key insights
- Berkshire Hathaway's substantial cash hoard of nearly $400 billion is becoming a significant earnings engine due to higher interest rates. With the Federal Reserve's target rate elevated, this cash generates meaningful income, offsetting the lack of attractive investment opportunities. This situation suggests that higher rates, even without immediate deployment of capital, are a net positive for Berkshire and its shareholders, potentially indicating a sustained period of elevated rates and cautious investment strategy.
Berkshire Hathaway (BRKA 0.57%)(BRKB 0.62%) is an unusual company. Technically a finance business, thanks to its large insurance operations, it is operated as a conglomerate, owning a shockingly diverse portfolio of businesses and even a portfolio of common stocks. Cash is also a key part of the equation, with the current balance sitting at nearly $400 billion. That's a big plus today.
For decades, former CEO Warren Buffett managed Berkshire Hathaway's portfolio, successfully buying and selling assets to the benefit of shareholders. His successor, Greg Abel, now oversees the portfolio. But like Buffett, who helped train him, Abel isn't inclined to buy just for the sake of buying.
Both have something of a value bias, and with the S&P 500 index (^GSPC +0.22%) trading near all-time highs, it is hard to find attractive businesses to buy. When there's nothing worth buying, Buffett and now Abel allow cash to accumulate on the balance sheet. So, from one perspective, the company is building a cash hoard to use when investment opportunities finally become available. That could happen during the next bear market, which will eventually come.
When interest rates were hovering at historically low levels, holding cash was a purely strategic decision because it generated little interest income. But interest rates are higher today, with the Federal Reserve's target set at 3.5% to 3.75%. The company's cash is now providing it with a far more meaningful income stream. Berkshire Hathaway and its shareholders would probably be better off if that money were invested, but only if it were invested in attractive businesses. Given the lack of investment candidates, more cash and higher interest rates are still a pretty good outcome.
The big picture is that it is unlikely Berkshire Hathaway will invest $400 billion very quickly. So the cash balance is likely to remain high, if not grow even more. The rise in inflation, meanwhile, suggests that interest rates will remain elevated for the foreseeable future, consistent with the higher-for-longer hypothesis.
That said, if the Federal Reserve is forced to raise rates to combat the current bout of inflation, the cash balance becomes even more valuable because it will producer a larger income stream. Meanwhile, if there's a recession and/or bear market, the cash will help offset the headwinds Berkshire Hathaway will face with its operating businesses and stock investments. And it will give the company the firepower to buy companies when prices are depressed, as everyone else is selling.
Given the market environment, investors shouldn't look at Berkshire Hathaway's growing cash hoard as a negative. It is meaningfully adding to the company's income stream (and could add even more if rates rise) while also positioning the industrial conglomerate for the next big bear-market buying opportunity. While it isn't ideal for Berkshire Hathaway to hold cash, it isn't exactly a hardship, either.