Berkshire Hathaway (BRK.A -0.51%) (BRK.B -0.52%) recently released its annual report, revealing that the conglomerate holding company had a record high of $168 billion in cash and cash equivalents at the end of 2023. With that staggering amount of cash, many investors may question how Chairman and Chief Executive Officer Warren Buffett might put it to work. Lucky for us, Buffett outlined why he is hoarding the cash in his annual letter to shareholders.
Let's look at how Berkshire built its unprecedented cash hoard, what the company currently does with its cash, and what it might take for Buffett to deploy it meaningfully.
Berkshire's operating earnings are adding up
Buffett's preferred metric for Berkshire's success is operating earnings -- a measurement of a company's profit from its core operations after expenses. In 2023, Berkshire generated $37.4 billion in operating earnings, an increase of 21% from $30.9 billion in 2022.
As a result of Berkshire's strong business performance, and being a net seller of its stock holdings in 2023, the company's cash position soared from $128.5 billion to $167.8 billion, or an increase of 31%.
What Berkshire is currently doing with its cash hoard
In the near term, Buffett appears content with holding the majority of Berkshire's cash in Treasury bills -- a short-term security backed by the U.S. Treasury Department with a maturity of one year or less.
As of Dec. 31, Berkshire held an astounding $133.4 billion in Treasury bills, with yields in the neighborhood of 5% to 5.4%. If yields remain on the low end of that range throughout 2024 and Berkshire maintains its current position, the company will generate about $7 billion from those investments.
In past annual shareholder letters, Buffett has emphasized that Treasury bills serve as Berkshire's "default" choice for the company's cash when compelling investment opportunities are scarce, owing to their liquidity and safety.
Additionally, Buffett once wrote: "Over the long term, however, [Treasury bills] are riskier investments -- far riskier investments -- than widely diversified stock portfolios that are bought over time." The risk Buffett is referring to isn't that the U.S. government won't pay, but that Treasury bills often lose money to inflation. That isn't the case in the short term, with the current inflation rate in the U.S. at 3.1% during the past 12 months, according to the consumer price index.
4 Week Treasury Bill Rate data by YCharts
Another way Buffett utilizes its mountain of cash is by repurchasing shares of Berkshire Hathaway. In 2023, Berkshire spent $9.2 billion on share repurchases, lowering its shares outstanding by 1.1%. During the past 10 years, Berkshire has lowered its shares outstanding by 12.2%. By reducing its share count, Berkshire rewards existing shareholders by increasing their ownership stake.
What else could Berkshire do with its cash?
Berkshire could return capital to its shareholders through dividends, but that route seems unlikely, considering the company has never paid one during Buffett's tenure.
Otherwise, Berkshire could continue to make acquisitions -- it bought insurer Alleghany Corporation for about $11.6 billion in 2022, and it recently purchased the final 20% ownership interest in the travel center network Pilot Flying J for a total investment of roughly $13.6 billion.
Berkshire also holds a portfolio of stocks estimated to be worth $372 billion, including a $165 billion stake in Apple, and can continue to add to it with its mountain of cash.
One downside Berkshire faces, given its market capitalization of nearly $900 billion, is that Buffett may struggle to find stocks worth buying that will make a meaningful return. Buffett touched on this point in his most recent annual shareholder letter: "Given Berkshire's present size, building positions through open-market purchases takes a lot of patience and an extended period of "friendly" prices. The process is like turning a battleship. That is an important disadvantage which we did not face in our early days at Berkshire."
Image source: The Motley Fool.
Berkshire is unlikely to go on a spending frenzy
Despite having a mountain of cash at his disposal, Warren Buffett is unlikely to deploy the majority of it any time soon. In part, that's because, as an insurance company, Berkshire will always need a cash reserve in the event of catastrophic losses. The company's float, or premiums from its insurance customers paid upfront, can be used for investments, but it is also needed to settle claims. To that effect, Buffett has frequently stated that Berkshire will never hold less than $30 billion in cash and cash equivalents.
In addition, Buffett does not want to see his beloved company fall victim to an economic crisis similar to the Great Recession in 2008. The Oracle of Omaha recently explained his stance on Berkshire's current cash position:
Extreme fiscal conservatism is a corporate pledge we make to those who have joined us in ownership of Berkshire. In most years -- indeed in most decades -- our caution will likely prove to be unneeded behavior -- akin to an insurance policy on a fortress-like building thought to be fireproof. But Berkshire does not want to inflict permanent financial damage.
Is Berkshire Hathaway stock a buy?
Berkshire Hathaway has generated an incredible compound annual gain of 19.8% from 1965, when Buffett took control, to 2023, significantly outpacing the S&P 500's compound annual gain of 10.2%. While Berkshire's growth prospects may be limited in some regards, there is simply no other public company in the market as well-positioned for a market downturn. That alone makes Berkshire Hathaway a solid addition to any stock portfolio.
