With what looks like a record supply of cash, Berkshire Hathaway has chance to ‘move the needle’ for its shareholders

Berkshire Hathaway earnings - graphic

If you’re shopping, $75 billion would get you Norfolk Southern Railway, Dr Pepper/Snapple and the Kroger stores — all of them.

Or maybe you’d like Dollar Tree, Principal Financial Group and Phillips 66. Or Estee Lauder, Weyerhaeuser and AutoZone.

The market value of each of those groups would fit within the cash hoard that Berkshire Hathaway Inc. is likely to disclose in its third-quarter financial report Friday, a record amount for Berkshire that has people wondering what’s next.

The money, officially called “cash and cash equivalents,” is growing by more than $1 billion a month. It’s a good problem to have, but Berkshire’s growing green pile also is an opportunity.

Chairman Warren Buffett and his money managers, Ted Weschler and Todd Combs, have the task of deploying that cash on behalf of Berkshire’s 1 million-plus shareholders.

The companies listed are just examples to show how much $75 billion would buy. There’s no reason to think any of them are targets, and Buffett Co. don’t talk about their investment ideas ahead of time.

Although predicting Berkshire buys has been a largely futile exercise, some observers had speculated in advance about its most recent purchase, Oregon aerospace manufacturer Precision Castparts Inc.

Since that $32 billion purchase — $23 billion of it in cash — early this year, Berkshire’s cash-on-hand has been rebuilding. Now Precision Castparts’ earnings are adding to Berkshire’s operating income, which is the measure that Buffett says is the best way to judge the company’s performance.

Analysts surveyed by FactSet predict third-quarter operating income of $2.02 per Class B share, or $3,021 per Class A share. (Each Class A share can be converted into 1,500 Class B shares.)

Trends in net income, generally considered the most important indicator of success for most businesses, are less important for Berkshire because that figure can be affected by wide swings in the paper value of its insurance-like derivatives and by investment gains and losses, Buffett has said.

Berkshire’s cash supply can be seen as a negative, especially because today’s low interest rates on ready-cash investments minimize any return for Berkshire investors.

Buffett’s philosophy is to keep at least $20 billion in cash in reserve in case there are huge insurance losses or big investment opportunities pop up unexpectedly.

He likes to say that the cash supply guarantees that Berkshire’s checks will clear the bank.

The longer-range value of Berkshire’s cash is that Buffett, Weschler and Combs are free to consider huge investment projects that would “move the needle” at Berkshire, making a substantial difference in its earnings despite its growing size.

With Berkshire’s market value of more than $350 billion and revenue likely approaching $220 billion this year, increasing its profits by even 5 percent is a challenge. For example, Precision Castparts’ $10 billion in revenue in 2015 would amount to less than 5 percent of Berkshire’s annual revenue these days.

Berkshire has three ways to grow:

» Its 100-plus operating businesses can expand within their own sectors, in some cases buying up related companies.

» It can acquire new businesses using the cash that its businesses generate.

» It can invest in other businesses, becoming a part-owner and sharing it those businesses’ profits.

Last month Morningstar, a market research company from Chicago, analyzed Berkshire’s businesses and concluded that the company is worth more than investors think. But since then, its stock price has dropped about 2 percent, lagging the overall stock market.

Greggory Warren, an analyst with Morningstar, said having loads of cash is a double-edged sword: It underlines Berkshire’s financial stability, but shareholders aren’t benefiting because interest rates on cashlike investments are so low.

“You’re not really earning a whole lot on it,” Warren said. At about $16 billion in free cash flow per year, “it does build up. So far they’ve been able to find deals from time to time, but it is kind of a cash drag.”

The cash accumulation also speaks to the discipline that Buffett and his vice chairman, Charlie Munger, have in making investments, Warren said. If they feel any pressure to make investments just because they have the cash, they don’t let on.

“I’m sure they’re looking,” he said. “But they’re patient.” For shareholders, he said, “You’re trusting in their ability to put that capital to work.”

As for Berkshire’s operating businesses, Morningstar’s Warren said they are diverse and can absorb the down cycles in some sectors. Railroads, including Berkshire’s BNSF Railway, are still suffering from low volumes of coal shipments, he said, and sales of airliners that use Precision Castparts’ products are down.

Low gasoline prices and the rise of distracted driving have been cutting Geico’s auto insurance profits, he said, but “most of the businesses are fairly stable. It’s never really that dramatic.”

Buffett has ruled out paying any of the cash to investors as dividends, and shareholders voted overwhelmingly against the idea in 2014.

There’s one more potential use for Berkshire’s cash: buying up some of its own stock.

Under a plan approved by Buffett and the Berkshire board in 2011, Berkshire could buy up some of its own shares, leaving the remaining shareholders with bigger pieces of the company. The company has purchased shares twice, $67 million worth in 2011 and $1.2 billion worth in December 2012.

Warren, the Morningstar analyst, said Berkshire’s share value would have to decline by about 12 percent to reach the point where the buy-back program would kick in. The price and value were close to that point in February but not since.

If the overall stock market were to have a big decline for some reason, Warren said he doubts Berkshire would suffer as much. “People look at it as more of a safety investment.”

But if there is another buyback, Buffett said in 2013, “we will be aggressive.”

Berkshire Hathaway Inc. owns the Omaha World-Herald.

Correction: Kroger stores’ name was misspelled in a previous version of this story.

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