Cash flow generation
Berkshire Hathaway (BRK.B) generated $45.8 billion in operating cash flows in 2017, an average of $4.0 billion per month. This increases its total cash reserves to $116.0 billion. The company’s liquidity forms a stellar 23.0% of its total market capitalization.
Berkshire Hathaway’s CEO, Warren Buffett, has hinted about a big-ticket acquisition. However, if an acquisition with a valuation above $30.0 billion isn’t executed, pressure on the company to return capital through dividends and repurchases is expected to continue.
The Tax Cuts and Jobs Act can also fuel the expansion of cash flows in 2018, resulting in higher return on equity and subdued return on assets. Berkshire Hathaway is also focusing on reducing its leverage, as reflected in higher repayments.
The company is looking to offset higher finance costs amid rising interest rates. Higher interest rates would dent the profitability of highly leveraged companies in 2018 and beyond.
Expansion of investment portfolio
Berkshire Hathaway (BRK.B) expanded its investment portfolio in 4Q17 to $191.0 billion, helped by additional purchases in select existing companies. The expansion of its investment portfolio can be the fastest way to deploy its operating flows.
However, given the track record of its managers, Buffett and Charlie Munger, current valuations don’t support major purchases through secondary markets.
Major asset managers (XLF) like BlackRock (BLK) and State Street Advisors (STT) are managing $2.0 trillion–$3.0 trillion in ETFs alone and another $1.0 trillion–$2.0 trillion in active offerings. As an active asset manager, Blackstone (BX) is handling assets above $400.0 billion. There is clear-cut scope in an expansion of investment portfolio subject to valuations being favorable.
Another area where Berkshire Hathaway can increase investments is global deployment. Against the backdrop of a weakening dollar, global investments can be favorable for the company at least in the medium term. Emerging markets can also offer investments at favorable valuations.