NEW YORK — Warren Buffett, chairman and CEO of Berkshire Hathaway Inc, said his conglomerate, which is sitting on US$116 billion of cash, is “more inclined” to repurchase stock than pay dividends as a means to use excess cash.
Speaking on CNBC television on Monday, Buffett said the corporate income tax rate cut signed into law by U.S. President Donald Trump in December is a “huge tailwind” for U.S. companies and that it is “really good for Berkshire.”
Berkshire attributed roughly US$29.11 billion of its net income last year to the reduction of the corporate tax rate to 21 per cent from 35 pe rcent. Many U.S. companies’ reported results have been skewed by the law’s impact.
In his annual letter to Berkshire shareholders on Saturday, Buffett lamented his inability to find big companies to buy and said his goal is to make “one or more huge acquisitions” of non-insurance businesses to bolster results at Berkshire.
Buffett said finding things to buy at a “sensible purchase price” has become a challenge and is a major reason Berkshire is awash with US$116 billion of low-yielding cash and government bonds, whose average maturity was 88 days as of the end of 2017.
“I am fairly confident we will find ways to deploy” Berkshire’s excess cash, Buffett said on CNBC. “The best chance to deploy money is when things are going down.”
Buffett says he has confidence in Wells Fargo & Co Chief Executive Tim Sloan, as he tried to move the third-largest U.S. bank past scandals over how it treated customers including by creating unauthorized accounts.
Berkshire owns nearly 10 per cent of Wells Fargo. Earlier this month, the Federal Reserve surprised many by imposing limits on the San Francisco-based bank’s asset growth until it addresses problems.
Buffett likened the situation to when he was installed in 1991 as chairman of Salomon Brothers Inc after a former chief executive failed to tell regulators that a trader was submitting fake bids at Treasury auctions.
“Digging your way out of it takes time,” Buffett said. “He’s got a lot to clean up.”
Buffett raised red flags about ordinary investors using borrowed cash to buy stocks, or buying “on margin.”
Buffett said it was “crazy” to borrow money to buy stocks and that “it is insane to risk something you have and need” for the sake of leveraging up on stocks. Buffett said investors might get a “euphoric surge” if they double their money in stocks, but would not be “happier.”
The letter included “more than a subtle warning that prices, on many fronts, are high,” said David Rolfe, the chief investment officer at Wedgewood Partners, a money manager that oversees US$4.5 billion, including Berkshire shares. “Take heed.”
While mergers and acquisitions slowed globally last year, deal prices have been climbing and there are signs 2018 is getting off to a faster start. Acquirers paid a median of about 12 times earnings before interest, taxes, depreciation and amortization in 2017, up from a multiple of 8.9 in 2013, according to data compiled by Bloomberg.
Few CEOs have as extensive a track record of buying businesses as Buffett. Since he took control of Berkshire in 1965, his patient stream of acquisitions has transformed the company from a struggling textile maker into a conglomerate now valued at about a half trillion dollars. Its subsidiaries include electric utilities, BNSF Railway, auto insurer Geico, Dairy Queen, Duracell and dozens of other enterprises.
Operating earnings from those businesses slumped 18 per cent last year to US$14.5 billion after the company’s insurance operations posted their first underwriting loss since 2002. But book value per share, a gauge of Berkshire’s net worth, climbed 23 per cent last year, in big part because of changes to U.S. tax law. Buffett has said the metric is a “crude, but useful” measure of how much the conglomerate is worth.
Still, it was the cash pile that drew attention. Last year, it climbed 34 per cent to a record US$116 billion. Deploying those funds into new, large acquisitions is key to Buffett’s strategy to increase the earnings of his company over time. For now, most of Berkshire’s liquidity is in short-term U.S. Treasury bills, earning “only a pittance,” the billionaire wrote.
Some longtime Berkshire investors said that, while the cash figure is staggering, they weren’t concerned about Buffett’s ability to find another huge acquisition.
“Everybody’s always impatient” about deals, said Steve Wallman, a money manager in Wisconsin who owns Berkshire shares. Buffett’s pattern is to make “punches” — investments where he commits a large amount of capital that have the potential to take his company to the next level, Wallman said. “He’s getting ready for another punch.”
Tom Russo, who oversees about US$14 billion at Gardner Russo & Gardner, including Berkshire shares, said he has no question that Buffett’s “going to be able to put a tremendous amount of cash to work — possibly soon.”
Other parts of the letter, which was notably shorter than in years past, covered well-worn territory for the billionaire. Buffett again called out the wasteful fees that many money managers charge and highlighted the risk of owning supposedly safe bonds.
Things Left Out
There were also striking omissions. Despite his normal fist-pumping about the U.S. economy, Buffett made only a brief reference to how the country remains “fertile” ground for business. He didn’t mention Berkshire’s new venture with Amazon.com Inc. and JPMorgan Chase & Co. to start a health-care company. And the billionaire investor barely elaborated on the new U.S. tax code or the stocks in his portfolio, including his recent build-up of Apple Inc. shares.
Also absent: a deeper explanation of why Berkshire promoted two longtime executives — Ajit Jain and Greg Abel — to vice chairmen last month, or how their new roles affect the succession plan at the conglomerate.
“Bottom line,” said Jim Shanahan, an analyst at Edward Jones who covers Berkshire, “you’ve got a letter that was short.”
© Thomson Reuters 2018, with files from Bloomberg.com