Berkshire Hathaway (BRK.B) had liquidity of $118 billion at the end of the first quarter. The company is adding ~$4 billion in operating cash flows every month. The numbers are expected to rise to $150 billion by the end of 2018 if there are no major investment portfolio expansions or acquisitions.
CEO Warren Buffett has indicated a big-ticket acquisition in 2018, but concerns about low valuation show that making deals in this market would be a daunting task.
Berkshire’s current liquidity forms 24% of its market cap. There is increasing pressure on Berkshire to put that money to use to generate a return on equity or to provide returns in the form of dividends and repurchases.
Berkshire hasn’t rewarded its shareholders with dividends. It has put a buyback policy in place without any fixed amount with a couple of conditions:
- trailing valuation of lower than 1.2x of book value
- liquidity of $20 billion or higher
Berkshire is currently trading at a price-to-book value of 1.42x, far higher than the set limit. Hence, shareholder rewards seem less likely—at least at its current valuation.
On the dry powder or liquidity front, select alternative managers (XLF), including the Blackstone Group (BX) and KKR & Co. (KKR), have seen high liquidity in 2017. However, traditional asset managers, including BlackRock (BLK) and T. Rowe Price Group (TROW), have relatively low liquidity.
Seeking minority stakes
Berkshire Hathaway’s investment portfolio was valued at $197 billion at the end of the first quarter, forming ~40% of its current market cap. Buffett could expand his investment portfolio by focusing on global names outside of the United States as well as by targeting Chinese companies amid subdued valuations following a 20% fall in the broader market.
Global fund allocation could allow Berkshire to generate a higher return on equity in the current scenario, in which US companies are garnering high valuations.