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For each Post of the Week, Manlobbi writes “The community wants, dare I say needs, your Shrewdness.” This has caused me to think about why most of our recent posts on our board are short term oriented. We share news about Ajit selling stock and wonder about the implications. We have a lot of posts concerning puts and calls – trying to profit from BRK’s volatility. We do on occasion have people post about their early involvement with BRK – posts I thoroughly enjoy. But we don’t talk much any more about fundamentals and factors impacting BRK long range.

We certainly have Shrewdness in abundance in our group. I recognize some names from the early AOL board. And many more from the Motley Fool board. There are a number of new (to me) posters, but they sure seem to know their way around BRK and business. We have at least 60 members based on past Rec counts – and doubtless more that continue to just lurk. There’s a lot of Shrewdness available.

So, I wonder – as I mentioned in a post some time back about a long lunch with a BRK friend – if maybe we’ve about talked BRK “out”?

In earlier days, we spent a lot of time on estimating IV and how to track it. We debated the value of float. We wondered about succession. And we admired Buffett’s continuing ability to find acquisitions and equity purchases even as BRK continued to grow the size anchor.

But lately, we’ve come to realize that finding homes for BRK’s cash flow and cash hoard is becoming increasingly difficult. We maybe see the end of an era.

Not that this makes BRK a bad investment. As long as it retains cash, and the market is willing to pay a multiple of that cash (added book value) we’ll still see some price gains. (Note: This is long term. Changes in market multiples can overwhelm this for years.) And we treasure the diversity and safety of the Berkshire holdings.

So now I come to one fundamental that maybe justifies more discussion. What does BRK do going forward with its continuing cash flow AND with the large existing cash hoard?

I’ll share my views on these subjects, and maybe some specific areas for discussion. The purpose is to disclose what I’m thinking and to seek other insights and corrections. (Here’s where it may get too long.)

Utilizing BRK Continuing Cash Flow

BRK continues to throw off a lot of cash. And added float. I’ve tried to look at how much might be reinvested internally, and then how much is available for external investment.

Internally with business growth there is some need for added working capital. A simple measure would be growth in Receivables and Inventory minus Payables. But it’s damn hard (for me anyway) to sort out the Receivables minus Payables cleanly from what BRK discloses. BRK seems to run a pretty tight ship in this regard. There is a spread, but it doesn’t seem to be growing much. BRK does publishe inventory figures for Ins + MRS. And probably BNSF and BHE in separate documents. I haven’t researched that for this post.

I suspect Greg has paid a lot more attention to this area than Buffett did. I looked at the working capital estimates at the stockanalysis web site –for the period 2019 to TTM. It has bounced around a lot. Up several billion, down several billion recently. Averaging 2019 to last TTM, maybe it’s $2-3 billion growth a year? Not a stable period for forecasting.

BRK breaks out figures for capex and depreciation by business segment. Backing out BNSF and BHE (see below), the MSR businesses consume $1-2 billion a year over depreciation. So maybe $3-4 billion a year total working capital ex BNSF and BHE?

I back out BNSF and BHE because they basically fund themselves in a regulated business environment. They borrow cash for their business needs (capex and working capital), not look to BRK for it. And BRK HQ keeps its distance. It doesn’t guarantee their debt. For both liability and regulatory reasons, it acts to try to preserve their separate identities. At least that’s my take – more skilled analysts may disagree. This is one area where I seek discussion.

This brings up a bigger issue. It’s common to hear people talk about the big opportunities that BNSF and BHE offer for consuming BRK cash at a reasonable return. But they don’t actually use BRK cash - except maybe for a big acquisition. Then it would probably be in the form of a preferred loan that would pass regulatory review in setting prices. BNSF does send dividends to BRK HQ for reinvestment. BHE doesn’t – it retains all earnings. The only money that BHE sends to HQ is a small amount of interest plus some significant tax credits. Do others see this differently?

If I’m roughly right in the foregoing, then maybe only 10-12% of operating earning plus float changes (ex. BHE) are reinvested within BRK operations. The bulk of it must find a home elsewhere. Outside the regulated businesses, Buffett has built a collection of low capital intensity businesses!!

Now there are still buybacks. Here others can offer much more than I can contribute. In theory, there will be X% of trading days when BRK is trading below a conservative estimate (now by Buffett) of IV. On those days, BRK can purchase Y% of trading volume without moving BRK prices up to the cut-off price. So multiplying these factors, BRK can consume Z% of new cash flow in buybacks. I haven’t the foggiest guess what these factors are. (I’m excluding rare market crashes – i.e., what would be a normal expectation over time?) This is where the put/call traders who track such can help us understand expectations.

There are occasional opportunities for block purchases. These seem to come primarily from gifts to charity. I doubt Buffett pays much below market price for such purchases. He wouldn’t stiff charities – not his style. How many heirs will be willing to cash in below market prices and competitive bidding?

This only leaves dividends as a last resort use of operating cash flows. With the overwhelming number of long-rich BRK shareholders who don’t want dividends for tax purposes, I can’t expect any dividends until after Buffett is gone.

So my view is that some significant part of new cash flow must go into new investments – absent a very favorable buyback period. As the Red Queen stated to Alice, we must run fast to stay even.

Utilizing BRK’s Cash Hoard

Here I’m talking about those existing cash equivalents above what Buffet considers a reserve for unexpected Insurance and other events. These once had limits that we thought Buffett would never exceed – but that’s now all changed.

Or has it? Jim points out that as a percent of assets, we’re not that far above historic norms.

In what follows, I’m assuming that Buffett wants to reinvest $150-200 billion of this. But only at prices favorable to BRK shareholders. And he’s decided to wait for the opportunities. And even build more cash for such.

My view is that Buffett believes a major market downturn WILL provide him large opportunities for investing this cash. He has even stated that he wants to do a better job this time than he did during the last major downturn. Then he invested significant cash in short term support of companies and made good money. But only BAC seemed to be a long-lasting investment. And now he’s cutting back on BAC. He says he wants to make longer lasting investments in the next opportunity.

Given how high above history current market prices are, how much must the market drop before Buffett acts? And with the Fed fighting for a soft landing without a major recession, how long might this take? As the Fed cuts interest rates, the earning on retained cash drop. And discount rates on earnings drop driving stock prices still higher. Not a rosy near term outlook.

Will it take a major external shock for this opportunity to happen? War and a debt crisis from excess long term debt would seem to be the major potential events outside the Fed’s control. What else?

Moving on, now comes the question of competition for equities and acquisitions assuming a major downturn occurs. There’s no point in rehashing that competition from PE and retirement funds that now exists versus the halcyon days when Berkshire was the lender of last resort. Can BRK expect to achieve that position again? Or will the government intervene?

I’ll divert for a moment on a related topic. Buffett has a number of self-imposed restrictions on investing. Mostly these revolve around no negotiation, one-and-done offers. I don’t expect him to change in his lifetime. Will this change after he is gone? Will the board controlled by the Buffett family view this as a violation of the Berkshire culture? Will this be necessary to compete for future investments?

The exception to the foregoing scenario would be a massive “whale” acquisition such as Chubb. Or even Mars? I wouldn’t expect Buffett to overpay. Would he fully pay?

I don’t have firm thoughts about the many questions I’ve raised. What I do feel is that I need to be prepared for a long wait to see BRK redeploy cash in any major volume. And to be both positioned and willing to ride out a tough period in the interim.

I’ve already sold the last of my BRK in the tax deferred IRA. I’m basically locked into holding my non-IRA BRK, still the majority of my portfolio, because of capital gains taxes and the hope of a step-up for my heirs. Then they can decide if they have better options.

What are you folks doing?

"I’ve already sold the last of my BRK in the tax deferred IRA. I’m basically locked into holding my non-IRA BRK, still the majority of my portfolio, because of capital gains taxes and the hope of a step-up for my heirs. Then they can decide if they have better options.

What are you folks doing?"


Ironically, precisely the above.

I do think the step-up basis may be gone in the relatively near future.

What are you folks doing?

Staying put.

I think we all agree the days of large outperformance are over. I think we also agree the broader market appears to be on the high end of valuations (BRK too). In that case, BRK having a large cash position is a good thing, no? As a minimum, BRK acts sort of like a mutual fund that doesn't charge fees or pay dividends (which I don't want). So if BRK just matches the market, to me it is better than an index fund. And I don't think it is crazy to suggest that Warren, Greg, and Ted and Tod are in the upper tier of capital allocators, so it is reasonable to think of BRK as some kind of long term juggernaut. Could be wrong, but that is a reasonable view.

If you are reading this, you probably have been reading this board and its ancestors for 2+ decades. Which means, uh, we're all of a certain age. At this stage in my life, I don't want to get rich, I want to stay rich. If there is one thing we know about the Chairman it is he doesn't like to make mistakes. At this point, I'm cool with no mistakes.

Realistically, BRK has only two options for reinvesting retained earnings at present: (1) Internal reinvestment in existing businesses like BHE, BNSF & MSR. Hopefully at a decent rate of return (like 10%+). But even here, it is clear that Greg & Warren are not going to throw good money after bad in BHE. So it appears that BHE is not a great candidate until the liability issues are resolved for further investment. (2) Buybacks if the stock price corrects a bit.

If there were to be a major dislocation in the markets, it gives BRK the ability to add significantly more common stocks to the equity porfolio but given the high valuation of the market today, that's pretty much off the table except for one off stuff like OXY or Chubb.

I find it interesting that Buffett said BRK doesn't currently pay dividends in the 2023 AR. I find this sentence quite significant; it's as if he is preparing shareholders for the initiation of a (hopefully) small and perhaps a variable dividend in the future. He clearly thinks the days of major acquisitions are over.

I agree with others that the decision to sell is easier in tax deferred accounts; staying put in taxable accounts is probably the way to go even at a relatively rich valuation for BRK.

"I’ve already sold the last of my BRK in the tax deferred IRA. I’m basically locked into holding my non-IRA BRK, still the majority of my portfolio, because of capital gains taxes and the hope of a step-up for my heirs. Then they can decide if they have better options.

What are you folks doing?"

I have done the same. There have been some very good high yield options for IRA money, and for the sake of diversity if nothing else, all the BRK in my IRA's has been replaced with other investments. The taxable BRK has become quite substantial. I definitely don't want a dividend.

I’ve also sold all the Berkshire in my and my wife’s IRA, about 20% of our liquid NW. The rest of our liquid NW is held in after tax accounts, and it’s all Berkshire.

I don’t have any grand plans for all that cash, and notably this is way more cash than we normally keep on hand. However, I’ve finally realized I’m getting older, and I’ve “won” the investing game so to speak, so it just seemed logical to take some risk off the table.

However, being a Berkshire junkie, and without many other ideas (other than index funds), I could jump back into more Berkshire if it gets really cheap again. 🤷🏼‍♂️

the question to ask is what’s the alternative?
I have tried the following: borrow against my Brk shares, and use margins to buy other stocks — examples are DLTR DIS etc. And the result is I suck. It could be that I was doing value investing and it’s not working. But really the only way to you can beat BRK during the last few years is to buy high PE stocks like NVDA

Excellent post. Appreciate, agree, am doing essentially the same thing, nothing original to add, look forward to replies.

I'm only replying as your post's title reminded me of one of my favorite New Yorker cartoons...one I've used in the past at the end of a lecture:

https://imgc.artprintimages.com/img/print/perhaps-...

--sutton

why most of our recent posts on our board are short term oriented. We share news about Ajit selling stock and wonder about the implications. We have a lot of posts concerning puts and calls – trying to profit from BRK’s volatility. We do on occasion have people post about their early involvement with BRK – posts I thoroughly enjoy. But we don’t talk much any more about fundamentals and factors impacting BRK long range.

The answer to your question (bold by me) might be simple: Because having owned Berkshire for many years/decades now we all simply expect and trust Berkshire longterm to continue earning money and increasing it's value at a rate now similar to the S&P, and therefore it's current price less and less has the potential to influence our decision to be longterm shareholders.

That's the opposite of owning NVIDIA where one has to think about it's future, about potential competitors, about an end of the AI craze etc. etc. - - - and to always see it's then current price in light of those expectations one has about it's future, and to constantly make a buy/sell/hold decision.

Not so with our company, less maybe than with any other one on earth. As larger it gets as more unmovable it gets and as easier it gets to trust it to be as (positively) boring in the future as it is now, to be even by unfortunate events like the departure of important figures (may he still steer it at age 100) only temporarily shaken, knowing that it concerns only the price but not the value as long as it's culture remains more or less intact.

As long as the latter is the case it's therefore easy to trust the ones representing this culture and to leave thinking about "What can Berkshire do with it's continuing cash flow ..... with it's cash hoard" to them, to stop thinking about that. It's a matter of becoming lazy, of being able to become lazy, because of trust (in the people and the fact that the tanker can't easily sink). Not to forget the point of one post that being Berkshire shareholders for such a long time now means many here are a)old and b)wealthy, and both lead to putting more weight on safety than on chasing the highest returns (other than for sport, with a fraction of the portfolio) as it might have been for the same people 20 or 30 years ago.

This on the other hand explains the short term posts about options. If Berkshire's longterm future is of such little interest now that most of us simply have the majority of their Berkshire shares under their pillow and intend to continue sleep well on it for many years to come, then all that remains and wakes us up is short term stuff, regarding both, actions (buying/selling options) and words (posts).

One thought, Buffett is selling, everything

What are you folks doing?

Looking for better opportunities. As an example Google looks (looked?) attractive at $150 (check the Falling Knives board) - sold some BRK and moved it there. I always assumed BRK was permanent holding, I am less sure about this now (I still have a very large portion of the portfolio invested there)

tecmo
...

Great post and thread and appreciate you sharing your detailed thoughts and insights into Berkshire.

For me the question is why Berkshire versus an index.

Pros of Berkshire:

1. Management are already rich and have zero interest in paying themselves as much as they can get away with. Given the expected returns, a prudent investor might expect from Berkshire, or the index over the next 20 years might be in the zero to 5% range plus inflation. If you avoid having the typical clip that the average public company is leaking out in excess compensation for often poor performance, or in the case of big tech, just outrageous SBC. It’s a very significant plus being in shareholder friendly Berkshire. I’m no expert on financial markets but I get a clear impression that ‘retail investors’ are viewed as unsophisticated idiots to be taken advantage of at every turn. That includes: excessive compensation; compensation accounting tricks; IPOs when markets are high; excessive fees; lazy and poor management, mind numbing risk taking with other peoples money etc. I often hear that all the smart managers are running businesses for private equity. The public markets are just a place to abuse retail investors and dumb pension schemes managing other people’s money.

2. Berkshire are true value investors and allocate capital in an incredibly rational way and this avoids all kinds of problems that eventually surface in other public companies.

3. Berkshire’s businesses and investments, on the whole, do have sustainable competitive advantages. They may not be of the quality of Microsoft, for example but in many cases they will be around for a very long time. And eventually more and bigger gems will be added.

4. Anti fragile

5. Although excess capital is an issue currently. This can and has changed very quickly many times in the past.

6. At the end of the day, Berkshire just has an unusual ability to avoid interrupting the compounding process over multiple decades. That makes all the difference.

7. The index does have some wonderful businesses in it and many Berkshire does not own and over time the rising stars get added to the index. But the index has more businesses I would not want to own either because of lack of business quality, poor management, valuation, or lack of long term sustainability.

Very happy to have Berkshire as my largest holdings by a mile.

Even apart from the solid financial returns, it’s a great joy for all of us to be part of the positive unselfish culture which has filtered out from Berkshire into our own little lives and careers.

At the end of the day, Berkshire just has an unusual ability to avoid interrupting the compounding process over multiple decades. That makes all the difference.

💯 Well said. You appear to be channeling the great Robert Frost in The Road Not Taken: "I took the one less traveled by, And that has made all the difference."

I would also wager that Berkshire is likely to outperform the broader index slightly over the next decade just because the index valuation has become so egregious.

I appreciate the discourse generated in this thread!!

My $0.02:
If I live another twenty years (doubtful), my guess is our current holdings of Berkshire stock will have been split into three (3) or more stock holdings akin to how Danaher's holdings have similarly been cleaving into new corporate groupings. In walking around the exhibit hall last May, one could see how various companies could be marshaled into fitting groupings.

Berkshire Hathaway is a wonderful name. It has been applied to several Berkshire companies leading to good branding results. However, the day may come after Warren Buffett has departed the scene where the Berkshire name is associated with not so positive leviathan-type comments. We may have already seen peak Berkshire name in so far as positive public image. The energy fire-related lawsuits together with what seems like the beginning stages of regulatory rate push-backs for electric rates/utility compensation and the growing uproar over insurance availability/consumer costs are possible signals to how Berkshire may be increasingly viewed as a deep pocketed behemoth already making plenty of money from society. I know that is not the case, but if that were to become more of a recurring issue, post-Buffett leadership would likely opt to break up the company so as to take the behemoth aspect off the table. Smaller companies with non-Berkshire names ten years may be a more palatable image. You are welcome to yell at me for being a wacko for making these comments. I am a wacko and am seldom correct with forecasts.

Do I think Berkshire stock is a great long term holding? Absolutely!! The comments made above were to give additional possible reasons why our Berkshire stock will eventually be spun into multiple separate stock holdings and how those changes will benefit long term shareholders. The total valuation to us shareholders will be greater than the gain in the S&P. We are in a good place for the long haul despite how the company we know today changes in the years ahead.

Uwharrie

Buffett is selling, everything

I haven't kept up with all the form 4s, but what is Berkshire selling right now other than BAC. They've been selling BAC for a few months at or around $40, a few million shares a week if they can get their desired price level.

Okay, I should’ve stated,
They’re buying nothing.

They’re buying nothing.

This is clearly the case ... and is somewhat worrisome. I think there are a few reasons for it:

1. I think they've decided that any smaller purchase (under $5-10B) won't even move the needle, so why bother. If they buy $5B of something, they would have to buy 60 positions to use up the $300B, and then they pretty much become a mutual fund of sorts.
2. They want a BIG deal, or a few big deals. So maybe buy all of Chubb ($50B), or buy the rest of Oxy ($50B), etc.
3. They see nothing particularly attractive right now, or more accurately no attractive prices for what they think the business is worth.

#3 is the worrisome one.

https://www.berkshirehathaway.com/SpecialLetters/W...

https://www.berkshirehathaway.com/SpecialLetters/C...

I am holding and will add on dips. Those 50 year anniversary letters are getting dated but I still don't see too many companies that are better and as predictable as Berkshire. And you have a pretty good idea how to value it to scale up and down...

And you have a pretty good idea how to value it to scale up and down...

Just FYI, the book value metric discussed by Buffett in the special letter is no longer applicable; it was dumped in the 2018 annual letter in favor of long-term market value by Warren.

“ Very happy to have Berkshire as my largest holdings by a mile.

Even apart from the solid financial returns, it’s a great joy for all of us to be part of the positive unselfish culture which has filtered out from Berkshire into our own little lives and careers.”

Excellent thread! I echo EVBigMacMeal’s comments above. I am continuing to hold onto all shares both in IRA and brokerage accounts. Warren & Charlie have given tremendous & thought into succession & strengthening BRK for decades. They nourished the amazing culture and chose a wise & passionate Board who all have Real skin in the game. They honored Rule #1, analyzing/dealing with all types of risks. They have consistently thought and acted on behalf of shareholder partners, avoiding bureaucracy, loosened up the buyback criteria & set up Berkshire for several decades of ongoing success. I’m biased but we do have the best and most well informed, passionate and loyal owners. The Trust in Berkshire has been deserved, and partners have been consistently rewarded, regardless of their holding time.

No doubt, huge allocation decisions will be quite challenging but I trust Greg & Ajit will do an excellent job with their very gifted minds, experience & skill sets. They’ve had the greatest exemplars at the top, and they have seen it all flourish. Special opportunities to acquire businesses will occur less frequently, but I do see approval for even more liberal buybacks as cash keeps pouring in. The markets have much more option, momentum & algo trading and too many casino-like speculators, so further opportunities to add wonderful companies at fair prices will present themselves, but we may need the Patience of Charlie at times going forward.

If and when a dividend is created (after Warren), I bet it would be more of a time to time “special” dividend initially rather than an ongoing quarterly dividend.

Whether we see earnings of Jim’s projected long-term inflation + 6-8% or a bit less, I do think Berkshire will deliver quite satisfactory long-term returns and will reward its partners.

Greg has proven himself for a quarter of a century at BRK and seems to have a superb broad vision of the entire conglomerate and surprising depth of knowledge of a good many of the specific non-insurance businesses. Ajit is Ajit, simply the Best. It would be excellent if we could add greater Supercat and reinsurance coverage or a Chubb or Markel, given the right price.

Appreciate all of the various perspectives. Will be fascinating and fun to watch it all unfold.

If and when a dividend is created (after Warren), I bet it would be more of a time to time “special” dividend initially rather than an ongoing quarterly dividend.

I hope not.

Berkshire could pay a 2% annual dividend out of operating earnings. That would mess up our tax planning, but not too badly.

Berkshire could pay a 10% special dividend out of cash and still have a normal amount of cash left over. That would very much mess up many shareholders' tax planning. I'd be very upset.

In 2020 WEB said "So, we’re about 80% in-- roughly in equities and about 20% in cash".
As of Q2 it was more like 30% cash, and it's even higher now.

Like many here, I've sold all Berkshire in tax advantaged accounts, about 10% of holdings. Donating a few in taxable. Keeping the rest.

If and when a dividend is created (after Warren), I bet it would be more of a time to time “special” dividend initially rather than an ongoing quarterly dividend.

====

I hope not.

Berkshire could pay a 2% annual dividend out of operating earnings. That would mess up our tax planning, but not too badly.

Berkshire could pay a 10% special dividend out of cash and still have a normal amount of cash left over. That would very much mess up many shareholders' tax planning. I'd be very upset.



I think a special dividend fits better with Berkshire's general philosophy than a regular dividend. The idea is that cash can be allocated to acquisitions (in whole or in part), existing companies, share repurchases, or accumulated, or paid out as a dividend, probably in that order of priority. We may soon be at a point where cash use can not keep up with cash generation, as there are no big acquisitions available at good prices, no sufficient internal uses of cash at good rates of return, no repurchases given Berkshire's high share price, and levels of accumulated cash that become unreasonable, especially as short-term interest rates head back lower. Thus the dreaded dividend.

But there is no reason the dividend should be regular, any more than purchases of other businesses or reinvestment in exisitng businesses or share repurchases is regular - it should be done given the current circumstances, not blindly on a fixed schedule.

dtb

Berkshire could do what some ETFs & others have done.

Have an optional distribution, where your options are to take it in cash or in shares. The cash would be taxable and the shares are not.
I don't know the legal complexities, but that's how it works out. Maybe as some sort of mini-split?

In the ones I have had, the default was to take (non-taxable) shares so you had to specify if you wanted the cash.

Berkshire could do what some ETFs & others have done.

Have an optional distribution, where your options are to take it in cash or in shares. The cash would be taxable and the shares are not.
I don't know the legal complexities, but that's how it works out. Maybe as some sort of mini-split?


I was wondering about such a structure, too. Seems like an ingenious way of solving the problem of optimizing the distribution for different investors' circumstances, and something Buffett would probably be thinking about if he ever decided it was time to pull the dividend trigger.

From a brief look, it looks like share distributions, at least in Canada and the USA, would indeed be tax-free, but I am not an accountant.

Do you have any concrete example of companies that have done this? I have never heard of it being done, but it would make a lot of sense for all companies, not just Berkshire, so if it works, it seems surprising that it would be so rare.

Do you have any concrete example of companies that have done this? I have never heard of it being done, but it would make a lot of sense for all companies, not just Berkshire, so if it works, it seems surprising that it would be so rare.

The first one that comes to mind isn't great: Icahn Enterprises - IEP

Something weird was going on there - but they had that distribution structure.

So, I wonder – as I mentioned in a post some time back about a long lunch with a BRK friend – if maybe we’ve about talked BRK “out”?

I'm late to this, and possibly alone in my sentiments, but it seems to me there are more unknowns around Berkshire, and more interesting questions to discuss, than there have been in years.

Mr. Buffett just turned 94. We have discussed succession for so long it's as if the subject is exhausted, except now it's actually happening.

The new CEO will be an operations man. That is pretty much the exact opposite of the founder/current CEO, who famously ran a corporate office of fewer than two dozen people and practiced a management style of benign neglect or, as Mr. Munger put it, decentralization, almost to the point of abdication.

How do things change with an operator at the top? Does oversight of Berkshire's scores of wholly-owned businesses increase? Is there a process of culling some of the performance laggards that would be unthinkable under Mr. Buffett?

Is it possible that all the recent selling of Apple and BAC shares is not only for the usual reasons, company-specific or valuation, but clearing the decks and building up the cash hoard to provide maximum optionality to new leadership?

Is it possible that once the investor founder has departed, investing in public equities ceases to be a significant use of company funds?

What don't we know? What kinds of plans might Mr. Abel be developing over this extended transition period?

There has been some discussion that wildfire liability has rendered BHE uninvestable, but electric transmission and utilities are only one sector of the energy infrastructure space. What about generation? A new deal is announced seemingly every day to build new capacity that acres of prospective hyperscaler data centers will require. They're re-opening Three Mile Island with Microsoft as the sole customer! Is it possible Berkshire under Mr. Abel is poised to make major investments in this space?

Berkshire has been run the same way for so long, and there is so much respect, internally and externally, for the partners who ran it that way, that there is a tendency to think it will continue to be run generally in the same way. The history of iconic founders moving on suggests that seldom happens.

I am intrigued by what Berkshire will look like a decade from now. I hope to live to see it!

The first one that comes to mind isn't great: Icahn Enterprises - IEP

Something weird was going on there - but they had that distribution structure.


That's true, excellent example, I hadn't thought of them. Yes, I believe all shareholders have had the option to receive the dividend (although it is really more of a return of capital than a dividend). Icahn himself owns most of the shares, about 406m of the 486 implied shares outstanding, and he has consistently taken shares in lieu of dividends, while most other shareholders have taken the dividend which has been $1 per share for each of the last 5 quarters, with $359m in dividends paid out in the last 4 quarters according to cash flow statements.

Hmm, Icahn, maybe not the best company to keep. I asked perplexity.ai to give me some examples, but it couldn't find any (including IEP...), although it did mention that many companies offer DRIPs, where cash dividends are reinvested. This does not avoid the tax that many of us wish to delay, so for the moment, apart from Icahn, Perplexity and I are drawing a blank, probably because it really is rare.

But why would it be rare? It seems like any company that pays dividends must have investors that would rather reinvest PRE-TAX rather than post-tax, and if tax laws allow it, why wouldn't more companies offer this possibility?

dtb

I hope not.

Berkshire could pay a 2% annual dividend out of operating earnings. That would mess up our tax planning, but not too badly.

Yes a huge one-time dividend would be the worst case scenario for very long-term Berkshire shareholders. I would prefer no dividend at all but I would grudgingly accept a small dividend as the lesser of two bad choices.

Th best choice for un-investable (at good returns) excess cash would be if Berkshire board can provide the option to shareholders of either stock or cash. Long-term owners averse to paying huge taxes can choose stock and decide to either sell when they choose to (and how much) or make charitable donations in stock.

But why would it be rare? It seems like any company that pays dividends must have investors that would rather reinvest PRE-TAX rather than post-tax, and if tax laws allow it, why wouldn't more companies offer this possibility?

I recall some companies used to pay stock dividends way back in the 90s though I am not sure what the tax treatment of such dividends is.

In the last few months it has happened with 2-3 of the CEFs & ETFs I own. I always take the default and don't pay attention. I don't save the notifications.

I believe it happened with BST or BSTZ or possibly BCX. A couple of months ago.
There were a couple of others non-Blackrock.

I can't see Berkshire issuing its stock to anyone, including its shareholders.

I recall some companies used to pay stock dividends way back in the 90s though I am not sure what the tax treatment of such dividends is.

The was an oil&gas company that had two classes of stock, which I owned until they merged them.
One class paid $X.XX dividend in cash.
The other paid the $X.XX in worth of stock. That was non taxable.
I believe getting stock is legally treated as a small split. Which is not a taxable event.

Funny thing was, the second class was generally 10% lower price than the cash-paying first class.
So if you owned the 2nd class you could immediately sell the shares you just received and net more cash than what was paid out to the 1st class. (Actually, you would sell old shares to get the LTGC tax rate.)

The vast majority of shareholders own the 1st class.

Demonstrating the illogic of dividend-seeking investors. They preferred to get cash in hand instead of stock that was worth 10% more than the cash, which could be immediately sold and received 10% more cash.

It wasn't even funny, it was that way for YEARS. The company always complained that the 2 classes should not have any difference in price. They eventually merged them together, thus depriving us smart people of free money.

I can't see Berkshire issuing its stock to anyone, including its shareholders.

Warren won't be around forever.

I can't see Berkshire issuing its stock to anyone, including its shareholders.

BRK will do what's best for "life long" shareholders. If BRK stock trades at a reasonable price, the company would rather buyback their stock than issue a dividend.

If indeed there is a future dividend, I think the board would have no hesitation to declare a stock dividend to existing shareholders if that means a more tax efficient return of capital. If everyone chooses the stock dividend option, note that every stockholders ownership in BRK stays exactly the same. So there is no argument against it. Moreover, the index funds and other mutual funds may choose cash dividend so over time, it increases the relative ownership of individual, life-long shareholders vs. index funds.

BRK will do what's best for "life long" shareholders. If BRK stock trades at a reasonable price, the company would rather buyback their stock than issue a dividend.

If indeed there is a future dividend, I think the board would have no hesitation to declare a stock dividend to existing shareholders if that means a more tax efficient return of capital.


I like this point. If Berkshire shares are trading at a price below intrinsic value, Berkshire should use its excess cash to repurchase shares.

If the shares are trading above intrinsic value, and they figure they can't use the cash, then they should use extra cash to pay a dividend, but ideally allowing shareholders the option of getting a non-taxable stock dividend instead. For investors who elected that option, that wouldn't help with getting rid of cash, but it would be issuing shares above intrinsic value anyways, so in principle, Berkshire should not be opposed to that.

Go with the flow. Buy shares when they are cheap, pay a dividend and issue shares when they are expensive. Seems quite Buffett-like.

DTB

If indeed there is a future dividend, I think the board would have no hesitation to declare a stock dividend to existing shareholders if that means a more tax efficient return of capital.

A stock dividend isn't a return of capital. It does nothing to make the firm more valuable or enrich the shareholders. All it does is reduce dilution for shareholders of companies that issue a lot of shares for compensation or acquisitions. It makes no sense for BRK. If the directors want to return capital to shareholders, they can just keep buying shares opportunistically, and if they are feeling generous, they can establish an IV-plus-or-minus "floor" for the stock, so existing shareholders who want cash can always sell their shares at a fair price.

As we have discussed here many times, a BRK dividend doesn't do anything for anyone that they can't already do themselves with periodic sales. That might even be in the Owner's Manual. If you think you can do better than BRK going forward, you should be selling (withdrawing capital) now anyway, because prices are historically high.

As for me, I'm holding. WEB did not have to sell Apple or BAC. He has something in mind. The huge cash pile creates optionality - never a bad thing in uncertain times. I agree that the company will evolve with Greg the quintessential manager in charge, but I assume WEB and the board chose him to execute a strategy, so that's fine with me. I can't wait to see what it is.

abromber

@ultimatespinach, great observations and perceptive read on where the puck is going!

You allow the leader to play what they are good at. “Don’t hand a violin to a piano virtuoso, especially when they get on the big stage”- Buffett

I’m mentally prepared for an operations heavy, captive capital allocating Berkshire 2.0. The transition started in the 1990’s and likely picks up speed over the coming decades. The occasional partial ownership likely continues albeit in shrinking proportion. Welcome to boring.

"BRK dividend doesn't do anything for anyone that they can't already do themselves with periodic sales."

But it also comes at a cost for those with smaller holdings that may then have no shares left to hold.

"The huge cash pile creates optionality - never a bad thing in uncertain times." Which is often why some investors like to receive a cash dividend even if it isn't the most 'efficient' way for the company to allocate the capital.

I remember reading about Warren being involved in a situation where a dividend was paid (presumably to him but may have been by him?) but treated as a return of capital so didn't have any tax implications. I think it may have been back in the 70's. Presumably tax laws have changed around it now - but given the wide range of businesses operating under Berkshires umbrella, presumably there might be conditions that might qualify if BRK wanted to go down that route?

>WEB did not have to sell Apple or BAC. He has something in mind

> 3. They see nothing particularly attractive right now, or more accurately no attractive prices for what they think the business is worth.

These two have kept me up at night - figuratively, at least - lately.

I can't put my finger on it, but BRK feels like it's behaving differently. I don't know if it is just that Buffett is a bit depressed after losing his close friend, which is entirely understandable. I don't know if they have decided to begin implementing a form of succession planning, for any number of reasons. I don't know if they sense a major shift in the markets and are quietly and rapidly preparing for it. And it could be any combination of these or none of them.

The rapid and substantial sale by Jain is another puzzle piece.

I'm a hobbyist investor and not as talented as a number of longtime posters (across TMF and Shrewdm) and have "only" been following BRK for 20 years. Others here have a better perspective than me and I trust their opinions more, but I am personally holding onto my BRK and positioning myself bearishly.

There is a school of thought that the human mind is wired for conspiracy theories - we take observations and prior knowledge and try to extrapolate into the future unconsciously and constantly. As a result we sometimes connect the dots when the dots have no relation. I try to consciously rein in this tendency with Occam's razor, but I've been having a hard time doing so here.

All it [a dividend]does is reduce dilution for shareholders of companies that issue a lot of shares for compensation or acquisitions.

How's that, again?

Stock repurchases reduce dilution of existing shareholders. There are 100 shares outstanding; the firm issues ten shares to C-suite types; the company then repurchases ten shares on the open market. Net dilution zero; effect on company value, dependent on the price the company paid at the moment they repurchased.

Now the company issues ten shares for the suits, and has 110 shares outstanding. It declares a dividend. So, I guess if the dividend is engineered to be paid before the issuance, then you could argue that the dilution is less profound than it would have been. For the moment.

Is that what you mean? Because I don't see a lot of intermittent dividends being issued just before shares are awarded.

Or am I missing the point?

--sutton
(who misses the point regularly. Kids and spouses help with this knowledge.)

A stock dividend isn't a return of capital. ........

To be clear, I don't want a dividend from BRK. Earlier in the thread, we were discussing it as a last resort when all the other better capital allocation options have been exhausted by the company. In such an event, we were discussing how best the company can "soften" the blow of dividends in terms of taxes then payable by shareholders.

I can't put my finger on it, but BRK feels like it's behaving differently. I don't know if it is just that Buffett is a bit depressed after losing his close friend

This is the one option I would exclude 100%. Why? Because while Warren might(?) be depressed in my book he is the very last person to let himself be even a tiny bit influenced by that with respect to his duties and responsibilities toward his partners (us). I have far to much respect for him, for his rationality and integrity, to think for a moment this could be a reason for whatever action or non-action by him.

I personally think the most simple explanation is the most likely one: That he sees nothing really attractive and simply prefers to wait, that he feels again like the "oversexed guy in the desert". Would perfectly fit my picture of him as being the opposite of a "FOMO" type, without problems to wait and wait and wait until the harem appears.

This does not even require
I don't know if they sense a major shift in the markets and are quietly and rapidly preparing for it
as I picture Warren as thinking in this respect "Maybe a crash comes, maybe not. Trying to forecast that is a silly game in which I don't need to participate. I don't see good opportunities right now, that's all I need to know. So I wait and all else remains to be seen"

> "I personally think the most simple explanation is the most likely one: That he sees nothing really attractive and simply prefers to wait"

I don't know. The last 10-Q https://app.quotemedia.com/data/downloadFiling?web... (

                                                  June 30, 2024    December 31, 2023
                                                  (Unaudited)
ASSETS
Insurance and Other:
Cash and cash equivalents*                     $   36,884       $   33,672
Short-term investments in U.S. Treasury Bills     234,618          129,619
Investments in fixed maturity securities           16,802           23,758
Investments in equity securities                  284,871          353,842

... as compared to the prior year's second quarter (https://app.quotemedia.com/data/downloadFiling?web...).

                                                  June 30, 2023    December 31, 2022
                                                  (Unaudited)
ASSETS
Insurance and Other:
Cash and cash equivalents*                     $   44,611       $   32,260
Short-term investments in U.S. Treasury Bills      97,322           92,774
Investments in fixed maturity securities           22,353           25,128
Investments in equity securities                  353,409          308,793

I know we all know this, but the table format makes it more tangible for me, at least.

A $350B equity portfolio is reduced by 20% and short term treasuries are increased 150%, in under a year. It's a big move for someone I had considered patient. It could be as simple as not liking the size of BAC and AAPL positions, but not redeploying into equities and taking the 5% on treasuries instead is meaningful, given the capital gains bill. He could have sold more slowly, and even if he was really unenamoured with Apple, there are non-treasure alternatives.

Heico stood out to me in the new positions, he hasn't held a defense contractor in a while, even though I believe flight services won some contracts.

As an aside, I mean no disrespect with the comment about depression, I just don't anyone could not be affected by something like that in their life. We're all only human after all. I would not suggest it has influenced his sense of fiduciary responsibility, just perhaps the calculus in his tactical decision making.

I think a special dividend fits better with Berkshire's general philosophy than a regular dividend.
...
But there is no reason the dividend should be regular, any more than purchases of other businesses or reinvestment in existing businesses or share repurchases is regular - it should be done given the current circumstances, not blindly on a fixed schedule.


I agree with this statement, but I would add that a special dividend ALSO doesn't fit with the Berkshire general philosophy. That's because a special dividend is literally saying "you (the collective shareholders) know how to allocate capital better than we do", and that is clearly NOT the Berkshire general philosophy.

Buffett has addresses this issue.

Buffett said previously if a dividend were ever issued it would not be a fixed amount on a regular schedule. It was quite some time ago when he said that so perhaps that’s no longer his thinking.

Most of us would call that a “special dividend”…but I inferred Buffett was saying that would be his approach to dividend policy when/if issued: Lumpy, irregular, occasional, and sometimes very large. IF he ever paid one at all.

A $350B equity portfolio is reduced by 20% and short term treasuries are increased 150%, in under a year. It's a big move for someone I had considered patient. It could be as simple as not liking the size of BAC and AAPL positions, but not redeploying into equities and taking the 5% on treasuries instead is meaningful, given the capital gains bill. He could have sold more slowly, and even if he was really unenamoured with Apple, there are non-treasury alternatives.

What would you suggest instead? We are talking about over $100B.

(I've already suggested buying all of Chubb, ~$50B, and the rest of Occidental, ~$50B.)

What would you suggest instead? We are talking about over $100B.

Well SPY has returned 27% in the last year. Now, before people start saying overvalued etc. It could have been bought 1 year ago and sold today. Was it over valued 1 year ago? The market clearly says no.

So that opportunity was missed. What is the best place for money today? I don't think short term treasuries, but obviously a person with a far better track record than mine thinks short term treasuries are the best place to invest money.

Aussi

What would you suggest instead? We are talking about over $100B.

(I've already suggested buying all of Chubb, ~$50B, and the rest of Occidental, ~$50B.)

I believe BRK had close to that amount at the beginning of the year excluding short term investments required for outlier insurance reserve scenarios. I have heard a $30-40B number for reserves, and I've read Bloomstran talk about BRK really needing twice that figure. BRK had $164B cash + treasuries EOY 2023.

And given the chance to invest approximately $80B they put $7B into CB, and have increased cash + ST investments by 65% since then (by 125%, if you treat $80B as reserves). I had BNI shares when BRK acquired BNSF, so I know they can move deliberately, but in the context of the funds available it feels conservative. I don't trust my understanding of how BRK approaches large acquisitions enought to judge this well, honestly.

They have a great balance sheet, so they could take on debt to fund acquisitions, also, like they did with BNSF, without being forced to reduce equity exposure and pay capital gains. *If* they were bullish on equities.

I do think OXY and CB are both interesting and smart ideas. I have a little trouble reconciling acquiring OXY right now with trimming the CVX position, but they are very different E&P companies.

I can't suggest anything else, because I also don't know what to buy right now. Everything feels substantially overvalued and overleveraged. Yields are dropping, I am not constructive on crypto, gold is problematic and has rallied, and various systemic risk levels are high. I already don't feel good about the market, so I notice it when a company I've admired for years builds a large cash pile in a hurry, and at some expense.

We are talking about over $100B.

What form is this cash? Surely not in bank accounts with FDIC insurance.
Storage rooms full of $100 bills à la Breaking Bad?
Short term T-Bills?

It's my first post, I usually don't spend time chatting on BRK. I'm a bit surprised of the post and I think the answer is already "inside" the question: way too many thoughts..
Too much cash: "What the hell is wrong with that?" (Charlie's answer is still valid).It's BRK's "problem" since many years. Did cash create damages of any kind so far? Only in the minds of the short-term over-thinkers.
Keep the faith, and be patient. Time will come to deploy and the clouds will be nullified by new clarity.
If you are selling because of the high price or because of too much cash or whatever you're wrong.
Price was high in 1996 candidly admitted by Warren and Charlie at the GM. But me and Charlie "we are not going to sell".
I'm a long time shareholder, I never sold one.
I don't know if I'm posting again something but I understand that if you read the last 10Q and all the previous reports accurately and know most of the bouquet of businesses owned by BRK, well, there's not much of a novel in our world, damn right and happily so!
So I understand it's human to post something to gossip about! Have fun! Respectfully..

This is not 1996.

It should be noted, Warren Buffett gave rare investment advice on Berkshire B shares before they were issued in 1996 as the price was historically quite high. Buffett’s advice, which he repeated several times before the B share issuance: “I would not buy them”.

The growth of Berkshire’s revenues and earnings has decelerated since , as Buffett then promised. So you had an expensive, large, blue chip stock in a high priced market with promised decelerated growth with a CEO who said he wouldn’t buy the stock.

Since then the B shares have appreciated more than TWENTY TIMES, pegged to an insanely high $33,000 per A share.

Just hold the damn stock. And ignore calls to sell it. Even from THE most trusted sources. Like the one who chimed in in 1996.

Just hold the damn stock. And ignore calls to sell it. Even from THE most trusted sources. Like the one who chimed in in 1996.

I have been a holder of B shares from near the time of the split. I must qualify as a long term holder who has mostly followed this principle. But I am trimming back on my holdings and will probably continue to do so if I get the opportunity at high multiples. It strikes me that this is fundamentally, substantially different firm going forward than the one that was in place when B shares were first created. And its hard for me to believe that the multiple predictions by Buffett that the size of BRK will be a hinderance on future returns isn't going to come true. What is remarkable is not the prediction, which seems rationale and inevitable to me just as it seems to WB, but the fact that Buffett has managed to keep the reality at bay for as long as he has. But that time might be ending.

Five years from now, BRK will be run by an operations leader, with two investment managers who haven't shown nearly the stock picking ability of WB and CM. If recent history is an indicator, the culture of stock picking will also be less long term with a higher proportion of trading in and out of opportunities. BRK is already at a point where it generates tons of free cash flow and can't find enough productive investment opportunities to deploy it inside or outside. If it wanted to buy a giant company like Disney for example, it could do it today outright without even dipping into its required reserves or debt. Paying a high multiple for that kind of excess cash sitting in a company doesn't make sense especially if you don't have a WB and CM to deploy it.

Many people here oppose the company paying a dividend for tax reasons and argue you can create your own by selling B shares. But I think that misses the other part of the core reason for paying a dividend which is that it doesn't make sense for a corporate entity to be a holder of such huge sums of excess cash far beyond the firm's ability to productively deploy it. Once WB is gone, I would prefer that excess cash to be distributed back to me rather than left with the team at BRK. They will still have plenty of cash to work with and trouble deploying it given the quarterly cash generation of the underlying business. But unless they are about to make a huge entry into LLM development for AI where people are talking about hundreds of billions in investment required, they shouldn't hold $300M+ and growing cash balances. Allowed to go too long, that will inevitably lead to lower quality deployments or the firm becoming more and more like a T-bill mutual fund. Not what I would want as a shareholder and worth the tax bill to avoid.

I don't think BRK will be a bad business 5 years from now. The underlying businesses are of good quality and good cash generators. But some of them probably don't merit continued cash absorption and their future prospects are probably dimmer than what they used to be. I just don't think BRK merits the outsized position that it has in my portfolio today. So that means trimming at good opportunities when I can get them.

COUNTER: If things really do hit the fan and BRK gets the opportunity to deploy $250M in fantastic deals that refresh the underlying collection of businesses, that might change the equation. But when the circumstances for something like this does occur, its hard to tell if things are actually about to end or if it is an opportunity. Even Buffett had trouble deploying the cash with confidence during the GFC. Will the new mgmt have more courage than him? Seems like a tough thing to bet on.

Sorry - I meant Billions, not Millions on the cash balances.

YoungandOld, you are off by a factor of 1000. It's not $250M, it's more like $250 BILLION.


According to Berkshire Hathaway 's latest financial reports the company has $276.94 B in cash and cash equivalents.

<<COUNTER: If things really do hit the fan and BRK gets the opportunity to deploy??<<<

“if”..is incorrect. “when” is correct. Tomorrow, 2 years from now, 5 years from now.

Not sure when…but certain. The big market plunge opportunity comes every decade or so. You want to go all-in and have a massive arsenal of bullets to fire. That’s the lesson of Munger. You have to be very, very patient and then go ultra aggressive. It’ll be easy to deploy $279 Billion or more in such an opportunity. That’s how you make doubles and triples on safe , large caps in short time. I’m not in a rush and can live with single digit returns on that cash in the meantime. While 3/4 of a $Trillion in stocks and subsidiaries continue to move the needle for us,

This is an investment company that I entrust with high confidence to invest the excess cash it generates on my behalf. It’s not an auto company or fast food chain. I want GM or McDonalds to share with me some,or a lot, of their excess cash in the form of dividends. Agreed!

Buffett should continue to retain those $1 bucks rather than giving 75 cent bucks in the form of after tax dividend benefit to me.

Not sure when…but certain. The big market plunge opportunity comes every decade or so. You want to go all-in and have a massive arsenal of bullets to fire.

That sounds good in theory but Berkshire has not been a great deployer of massive amounts of capital in market plunges. In fact, the last time there was a full blown panic in 2020, Buffett was selling rather than deploying capital. Similarly, in 2008 they weren't particularly aggressive in capital deployment considering their resources at the time.
I'm not a fan of the Berkshire hoarding massive amounts of cash thinking it will behave differently next time markets are panic stricken. That's not where their skill as allocators lies and it would be more efficient to return capital they cannot deploy to shareholders rather than transition into a market timing operating.

$700 Billion of so in owned operating companies and investees, almost entirely long term or forever holdings is hardly “a market timing” operation.

Berkshire has not been a great deployer of massive amounts of capital in market plunges

Agree. And Buffett preached not to try to time market.

Buffett is 94. His lieutenants will soon be responsible for such dancing. Apart from being a cult follower, how much confidence do you really have on that?

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