Berkshire Hathaway (BRK-B) has reported strong revenue growth and solid balance sheets since the 2007 crisis. The company had $63 billion in cash reserves as of December 31, 2014.
From an asset management perspective, idle cash is considered to be lost revenue that could have otherwise been created with investments.
Berkshire announced its first stock buyback plan in 2011, and it made its first purchase in 2012, equal to $1.2 billion at 1.2x of book value. Berkshire will continue buying back its stock if it gets it for a price below the estimated intrinsic value. The intrinsic value is estimated to be at least 1.25x to 1.3x of its book value.
Berkshire Hathaway is generating $1.5 billion in cash every month. So it’s just adding to its pile of cash reserves. Berkshire believes in maintaining a minimum of $20 billion in “dry powder.” This way, the company has more than $40 billion readily available to either repurchase its own stock or purchase new entities.
Almost 18% of its market cap is in dry powder, which gives Warren Buffet the flexibility to make big ticket investments. The constantly increasing cash can create a drag on earnings, but if the market presents an opportunity to buy at low prices, then these reserves could be highly profitable for Berkshire.
Together these companies make up 5.93% of the Financial Select Sector SPDR Fund (XLF).
Berkshire Hathaway also competes with insurance giants including Allianz (ALV), American International Group (AIG), Metlife (MET), and other major players from the energy, industrial, and infrastructure sectors that form part of the iShares Core S&P 500 ETF (IVV).