“At Berkshire, the whole is greater — considerably greater — than the sum of the parts.” — Warren E. Buffett Chairman of the Board, Berkshire Hathaway Inc. Taken from the 2018 shareholder letter.
Berkshire Hathaway (NYSE: BRK.A) is easy to understand because it is Warren Buffett’s house of cash. Essentially, Berkshire Hathaway (NYSE: BRK.B) is designed to accumulate as much cash as possible.
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For instance, Berkshire Hathaway had $111.87 billion in cash and short-term investments on December 31, 2018. Importantly, that number was down from $115.99 billion in December 2017, but up from $103.64 billion in September 2018. Notably, Berkshire accumulated $8.23 billion in cash during 3rd Quarter 2018.
Hence, value investors need to ask how does Berkshire Hathaway rake in so much cash. Strangely, I can explain the success of Buffett’s House of Cash with one simple word: float. To elaborate, Buffett designed Berkshire to generate vast amounts of float, which leads to huge piles of cash.
How Buffett’s House of Cash Accumulates more Cash
In particular, Buffett himself estimates one Berkshire Hathaway company, car-insurance powerhouse GEICO generated $22.1 billion worth of float in 2018. Moreover, Buffett calculates GEICO’s float grew from $2.5 billion in 1995 to $22.1 billion in 2018 in his 2018 shareholder letter.
To clarify, float is Uncle Warren’s pet term for the cash insurers generate from premiums. In detail, the float is the difference between the premiums and the claims paid. For instance, GEICO generates float by selling a product people need; car insurance, on an installment plan. If the policyholder wants insurance, he or she has to send a cash payment every month.
However, float can refer to any regular cash payment a business takes in. For instance, rent, mortgage payments, loan payments, credit-card payments, car payments, advertising payments, newspaper or magazine subscriptions, and utility payments.
Float is the key to Buffett’s House of Cash
Consequently, Berkshire Hathaway’s portfolio is filled with stocks and companies in float-producing businesses.
For example, the utility holding company, Berkshire Hathaway Energy. Berkshire-owned utilities like NV Energy generate float because customers have to pay their bills each month if they want electricity.
Tellingly, the five biggest stock holdings at Berkshire Hathaway, include credit card giant American Express (NYSE: AXP), Apple (NASDAQ: AAPL), Wells Fargo (NYSE: WFC) Coca-Cola (NYSE: KO), and Bank of America (NYSE: BAC). Tellingly, four of those five companies; American Express, Apple, Bank of America, and Wells Fargo, generate float.
First, Amex generates float from all the credit-card payments. Notably American Express requires cardholders to pay their balance every month. Second, Wells Fargo and BofA are banks that create float with loan, mortgage, and credit-card payments.
Third, Apple collects float through iTunes, Apple Music, App Store, and other subscriptions. Notably, Apple Music can cost $9.99 a month, $14.99 a month for a family, $4.99 a month for a student, or $99 for a 12-month subscription, TechCrunch reports. Hence, Buffett owns Apple because of the float.
Why Buffett Loves Cash
Buffett loves accumulating cash because he can use the cash to grow Berkshire Hathaway’s capacity to accumulate more cash.
Accordingly, Berkshire Hathaway paid $26 billion to get total control of the Burlington Northern Santa Fe Railroad (BNSF) in 2009. The BNSF records an operating income of $2.061 billion and a net income of $1.372 billion on revenues of $6.206 billion for 4th Quarter 2018.
In addition, BNSF’s year-to-year revenues grew by 12% in 2018. Meanwhile, the BNSF’s net income grew by 34% in 2018, and the railroad’s operating income grew by 8% during 2018. Hence, Buffett knows to turn cash into revenue and income.
Buffett could buy the Burlington Northern Santa Fe because he had a huge pile of cash in 2009. Thus, Buffett got richer during the Great Financial Meltdown of 2008, because of his cash.
How much money is Buffett’s House of Cash generating?
Under these circumstances, Berkshire Hathaway (NYSE: BRK.B) makes lots of money in bad years.
For instance, Berkshire Hathaway records a negative net income of -$25.392 billion, a quarterly gross profit of -$25.013 billion, and a negative operating income of -$28.013 billion for 4th Quarter 2018. In contrast Berkshire Hathaway reported an annual gross profit of $10.021 billion, an annual operating income of $10.021 billion, and an annual net income of $4.021 billion for 2018.
To clarify, Buffett blames these losses on changes to the Generally Accepted Accounting Principles (GAPP) in his 2018 letter. Specifically, a new GAPP rules requires Berkshire Hathaway to record non-cash and capital gains losses in the 4th Quarter 2018 financial report.
However, Buffett notes that Berkshire Hathaway’s consistent and satisfactory operating earnings grew by 41% between 2016 and 2018. In comparison, Berkshire Hathaway reported consistent and satisfactory operating earnings of $17.6 billion in 2016 and $24.8166 billion in 2018.
How Much Cash is Berkshire Hathaway Generating?
Okay, so much cash is Buffett’s house of cash generating? Not surprisingly, the answer is a lot.
For instance, Berkshire Hathaway records a free cash flow of $6.348 billion and an operating cash flow of $10.845 billion for 4th Quarter 2018. Thus, Uncle Warren’s big bets on float and America are paying off.
Moreover, Berkshire Hathaway is still capable of generating a lot of revenues. For instance, Berkshire records revenues of $225.38 billion for 4th Quarter 2018 and $256.14 billion for 3rd Quarter 2018.
Thus Berkshire Hathaway still makes money when ycharts gives it a quarterly profit margin of -90.02% for 4th Quarter 2018. Berkshire can easily absorb those losses because of all of the cash it accumulates.
Is Berkshire Hathaway (BRK.B) the best Growth Stock around?
Under these circumstances, I consider Berkshire Hathaway one of best growth stocks around because of the continuing increase in the consistent and satisfactory operating earnings and the cash.
Therefore, if you can live without dividend, Berkshire Hathaway class B (NYSE: BRK.B) is well worth having in your portfolio at the $198.70 price reported on 8 March 2019. My prediction is that Warren Buffett’s House of Cash will keep growing and growing for a long time to come.
Finally, please read Uncle Warren’s 2018 Berkshire Hathaway shareholder letter. As always you will learn something new from it as I did.