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List of Figures

Figure 1.         Berkshire Hathaway’s Balance Sheet                                                             7

Figure 2.         Berkshire Hathaway’s Class A share price                                                     9

Executive Summary


The investigation conducted by JSC uncovered a growing concern of Berkshire Hathaway’s shareholders and potential investors: the amassing cash balance held on the balance sheet. This issue is concerning to shareholders and investors due to the large opportunity cost associated with holding cash that is not being invested. In addition to the large cash balance, Berkshire Hathaway operates under a no-dividend policy – meaning any excess cash held by the firm will not be returned to shareholders in the form of a cash dividend payment. Dividend payments are often used by publicly-traded companies as way of returning cash to shareholders.


Companies often find ways to return value to shareholders through acquisitions, capital investment, research and development, and process improvement. However, when there are not any attractive reinvestments options, companies will return the excess cash to shareholders rather than reinvestment. Per Ro (2018), Warren Buffet recognizes four methodsof utilization for Berkshire Hathaway’s profits and excess cash.


  1. Reinvest in the company
  2. Acquire other companies
  3. Repurchase shares
  4. Pay dividends


Although reinvesting in the company and acquiring other companies can provide long-term value to shareholders, these methods do not return immediate value. Of the four methods mentioned above, only two provide this immediate value: paying dividends and repurchasing shares.


Cash dividends are payments made to existing shareholders to distribute excess cash held by the firm (Picardo, 2018). However, with Berkshire Hathaway carrying a no-dividend policy, this is not a form of payment shareholders will ever benefit from.


To return cash to shareholders, Berkshire Hathaway opts to use the share repurchase method. Share repurchases are when a company purchases its own stock from the open market. Share repurchases return value to shareholders through the following:


  1. Decreased supply of shares in open market
  2. Higher share price
  3. Unrealized, non-taxable gain to investors


However, until recently, Berkshire Hathaway held a quite limiting share repurchase policy, making returned value a rarity for shareholders. In conclusion, of the investigation conducted by JSC, it is of professional recommendation that Berkshire Hathaway continues to loosen cash-returning policies. The result of implementing such recommendation has the potential to increase shareholder satisfaction, the number of investors, and long-term oriented investors.

An Evaluation of Berkshire Hathaway


Berkshire Hathaway is a large, multinational conglomerate holding company. Founded in 1955, it was not long before now Chairman and CEO, Warren Buffet, took over management in 1965 (“The History of Berkshire Hathaway”, 2015).


While under Buffet’s leadership, Berkshire Hathaway paved an incredible track record for itself. Since 1964, the share price of Berkshire Hathaway has grown over 2.4 million percent (Mullaney, 2018). This staggering performance is often greatly attributed to the exceptional leadership and investment qualities possessed by Warren Buffet.


Despite Buffet’s notable performance, there is a growing concern amongst investors regarding Berkshire Hathaway’s large cash balance. As noted in Figure 1, as of September 30th, 2018, the combined balance of cash and cash equivalents amounted to approximately $104 billion.This large balance concerns investors because cash held on the balance sheet is stagnant – it is not adding value to the firm nor the shareholders. However, how this cash can be used is clearly defined by a firm’s policies and procedures regarding cash.


Berkshire Hathaway has a history of strict policies regarding its use of excess cash and returning a portion of it to shareholders. These strict policies are what investors are raising questions and concerns about. With shrinking availability of value-adding investments, Berkshire Hathaway adopted loosened policies regarding the uses of their cash.


The loosening of these policies is a step in the right direction for Berkshire Hathaway, but to keep investors satisfied, more action will need to be taken.



Research and Investigation


Company History


Berkshire Hathaway was founded in 1955 after a merger between two textile companies: Berkshire Fine Spinning Associates and Hathaway Manufacturing (“The History of Berkshire Hathaway”, 2015). Beginning in 1962, Warren Buffet made his first investment in the newly formed Berkshire Hathaway company (“The History of Berkshire Hathaway”, 2015). Following a few years of progressive investments, Warren Buffet took over the management due to his majority ownership (“The History of Berkshire Hathaway”, 2015). Since Buffet’s takeover, Berkshire Hathaway began making strides by acquiring other under-valued companies and making minority investments in other companies Warren Buffet found attractive. Through this strategy, Berkshire Hathaway became notable for its share price appreciation.


Market Performance


Since 1964, Berkshire Hathaway experienced a 2.4 million percent increase in Class A share price (Mullaney, 2018). This means that a $1,000 investment in Berkshire Hathaway in 1964 would be worth approximately $2.4 million today. Though the returns are still impressive, it should be noted that when adjusted for risk, these returns would be slightly lower (Alexander, 2010). Much of this success can be attributed to the acquisition of some of today’s most recognizable brands, including:


  1. Dairy Queen
  2. Helzberg Diamonds
  3. Duracell
  4. Kraft Heinz
  5. Geico


These companies were acquired at a price Warren Buffet deemed to be under-valued, leaving much room for upside potential. Through the success of these investments and many more of the like made by Berkshire Hathaway, the firm has experienced substantial profits. Following these large annual profits was a growing cash balance.


Balance Sheet: Cash

Figure 1From: http://www.berkshirehathaway.com/qtrly/3rdqtr18.pdf, 2018

Berkshire Hathaway’s balance sheet has continued to grow since inception, especially the cash account. With over $104 billion in cash and cash equivalents as seen on Figure 1,Berkshire Hathaway has slowly become recognized as a cash hoarder. The $104 billion figure is derived from two types of accounts held on the balance sheet:


  1. Cash and cash equivalents ~ $41.4 billion
  2. Short-term investments in U.S. Treasury Bills ~ $62.2 billion


For financial purposes, short-term investments in U.S. Treasury Bills are considered cash, as they are highly liquid investments. 


This large balance of cash is concerning to shareholders because cash is not earning any interest. The approximately $62.2 billion held in U.S. Treasury Bills is only earning enough interest to keep up with inflation. Shareholders often prefer excess cash returned to them in the form of a dividend payment, so they can then reinvest the cash into an interest-bearing account. However, shareholders of Berkshire Hathaway do not experience this benefit as Warren Buffet implemented a no-dividend policy.


Dividend and Repurchase History


Since under Warren Buffet’s leadership, Berkshire Hathaway only paid a dividend one time and that was in 1967 (Investopedia, 2018). The lack of dividends issued is the result of the existing no-dividend policy held by the firm. This policy was adopted due to Buffet’s belief that reinvesting company profits is more beneficial to shareholders than paying them directly (Investopedia, 2018). Warren Buffet believes that by reinvesting profits, the company can improve in the following areas:


  1. Improved efficiency
  2. Expand its reach
  3. Create new products and services
  4. Improve existing products and services
  5. Further, separate itself from competitors.


Through these improvements and financial success, Buffet believes he can reward shareholders with higher stock values (Investopedia, 2018). With an expanding economy and higher prices, Buffet has had trouble with finding attractive investments for the excess cash, which reflects the large cash balance. With pressure from investors and diminishing investment options, Berkshire Hathaway began to explore ways to return cash to shareholders.


In 2011, Berkshire Hathaway adopted a share repurchasing policy, which allowed the firm to return cash to shareholders (Buhayar and Chiglinsky, 2018). Share repurchases involve the company using excess cash to purchase its own stock from the open market. This action can return cash to the shareholders through:


  1. Decreased supply of shares in open market
  2. Higher share price
  3. Unrealized, non-taxable gain to investors


Investors often find share repurchasing policies to be attractive for these reasons. However, Berkshire Hathaway’s repurchase policy was quite stringent. The price of the shares could be at a maximum of 1.2x the book value of the company for Buffet to authorize a repurchase (Buhayar and Chiglinsky, 2018). With that said, repurchases were a rarity, which led to the amendment of the program in July 2018 (Buhayar and Chiglinsky, 2018).


Following the amendment of the more stringent policy came a more lenient version. The new policy had the following guidelines:


  1. No limit on price in which shares can be repurchased
  2. Warren Buffer and Vice Chairman, Charlie Munger, must agree on price
  3. Cash balance must not be reduced below $20 billion


This new policy was a sign of relief for investors. As illustrated in Figure 2, following the announcement of this policy, Berkshire Hathaway Class A shares rose from $288,500 to $303,210, overnight. Shareholders were able to realize a more than 5 percent increase in share price (Comston, 2018). This is only one example of the benefits associated with a more liberal repurchasing policy.


Immediately following this new policy came, a wave of share repurchases by Berkshire Hathaway. During the 3rd quarter of 2018, approximately $1 billion in shares were repurchased (Duggan, 2018). This action taken by Berkshire Hathaway to deploy a small portion of its excess capital is a step in the right direction, but more steps will need to be taken to keep shareholders satisfied.


Summary and Recommendations


Through the course of JSC’s due diligence, investigation, and analysis, JSC has prepared recommendations for Berkshire Hathaway. Should these recommendations be implemented successfully, Berkshire Hathaway will experience the improvements that follow each recommendation:


  1. Conduct more cash-returning activities – shareholders will become less concerned with the large cash balance, leaving less pressure on management to do something with the cash.


  1. Increased shareholder satisfaction
  2. Higher share price
  3. Attract more investors


Shareholders will be satisfied knowing the company is putting excess cash to work. By Berkshire Hathaway repurchasing shares at an attractive price, they will be returning immediate and long-term value to shareholders. The immediate increase in share price will give shareholders immediate value. When the price rises, and Berkshire eventually resells, the company will then realize a profit, which will provide a long-term benefit to shareholders. Long-term value is just as important as short-term, so Berkshire must devise a plan to continue in the right direction.


  1. Revisit policies regarding dividends and share repurchases – Warren Buffet was always able to use his excess cash effectively by making large acquisitions. However, in a bullish market, Buffet views many investments as over-priced, therefore deciding to sit on the cash. Berkshire Hathaway should make long-term plans for cash deployment strategies for times like today.


  1. Clear policies will ease shareholder worries
  2. Established policies will make succession much easier
  3. Will be the current concerns aren’t of issue in the future


The adoption of a long-term policy regarding use of cash will be of great benefit to the health of the firm and shareholders, which are the ones most affected by this issue.


Stakeholders Affected


The issues addressed in this report greatly affect the existing shareholders more than anything else does.


Shareholders: Berkshire Hathaway shareholders are the primary stakeholders in this situation. By shareholders not receiving dividend payments, they are mainly relying on the price appreciation of the stock. However, by Berkshire Hathaway continuing to adopt policies favoring the return of cash to shareholders, investors will be more willing to consider the company as an investment option. If investors find Berkshire Hathaway to be more attractive, this will likely increase demand, which will raise the price of shares. This will leave the shareholders better-off than before.


The above recommendations can assist Berkshire Hathaway in providing more value to its shareholders. Should these issues continue to be neglected, there could be a negative impact on Berkshire Hathaway from an investment perspective. However, by following the recommendations above, JSC is confident Berkshire Hathaway and its shareholders will see a great positive impact, both financially and qualitatively.


Should further assistance be required, JSC has great confidence it would be able to successfully implement the recommended changes.


Download Questions

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