Deal Season For Buffett and Others: Here’s Why

When Apple (AAPL) CEO Tim Cook announced in April that the company was increasing the Apple stock buyback plan to $60 billion, it was the biggest capital allocation news of the year. But that’s just a stated intention to spend $60 billion by the end of 2015. Not small potatoes, but really no more than the $20 billion+ in cash Berkshire Hathaway (BRK.B) has committed to new deals so far in 2013.

Berkshire’s major cash commitments in less than half a year include the $12 billion for its share of the Heinz (HNZ) takeover, another $2 billion to purchase the 20% of Iscar it didn’t already own, and the latest announcement that its MidAmerican Energy unit will spend $5.6 billion to purchase Nevada utility NV Energy (NVE). MidAmerican has been in serious spending mode: In early January it announced it would spend at least $2 billion to purchase two solar projects outright from SunPower (SPWR). It also has committed another $1.9 billion to build wind turbines in Iowa; though that spend will occur over the next 2.5 years.

In the aggregate, all that spending has to amount to at least one “elephant” for Warren Buffett and Charlie Munger. Yet they still have plenty more cash on hand to burn through before they get anywhere close to the $20 billion of so Buffett has said he considers a permanent cushion given the vagaries of insurance claiming cycles.

BRK.B Cash and ST Investments Chart

BRK.B Cash and ST Investments data by YCharts

It’s hard to spend down your cash when your operations are funneling so much earnings your way you end up with more than $12 billion a year in free cash flow. (And Berkshire is not shy about ponying up for capital expenditures.)

Assuming all the spending of late has pushed Berkshire’s cash position south of $35 billion (net of incoming cash from operations) it would still have one of the biggest cash positions among the non-financial stocks in the S&P 500. Using YCharts Stock Screener, Pro subscribers can start with the S&P 500 stocks and then exclude the financial services sector. That knocks out Berkshire Hathaway as well, given that it is officially categorized as a diversified insurance company, despite its significant industrial operations. So a simple tweak is to “add” back the diversified insurance group. After adding “Cash and Short Term Investments” as a filter, and ranking by that financial data point ,the resulting list turns up an intriguing list of companies with a whole of cash to allocate.

Aegon (AEG) and ING (ING) should be tossed; they are indeed straight up insurance companies, unlike Berkshire’s diversified business. That puts General Electric (GE) and its $125 billion in cash and short-term investments at the top of the list. Yet that too is a bit misleading, as GE derives a significant portion of its business from its financial services arm.

Still, GE clearly is feeling flush enough these days to be spending again. It recently announced its own big buyback program, increased the recovering GE dividend and is doing deals. In late December it announced it would buy up Italian aviation parts manufacturer Avio for $4.3 billion, and more recently it announced a $3.3 billion deal for Lufkin Industries (LUFK). The company says it has another $2.4 billion to spend on acquisitions for the remainder of the year.

The rest of the list suggests there could be some big deal making in pharma and tech, as the likes of Microsoft (MSFT), Google (GOOG), Apple, Johnson & Johnson (JNJ) and Pfizer (PFE) have large cash positions. Given that a significant portion of the cash is held off-shore, it’s conceivably easier to spend the money on some one-off acquisitions, rather than having to suffer the indignity of repatriating the money and having to pay tax, in order to commit to a rising dividend payout. (or in the case of Google, initiate a dividend, god forbid.) Or maybe at this juncture, with the market (and market capitalizations) up sharply, the cash kings are looking to keep some powder dry in hopes of deploying at the next sizable market correction. Though Berkshire’s recent deal making suggests now isn’t exactly a bad time to spend. All that’s clear is that those deep cash positions provide plenty of flexibility to spend -- either on deals or returning capital to shareholders. Or waiting for a hedge fund agitator to get on your case.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. For a demonstration of YCharts Platinum, go to http://ycharts.com/info/pro_platinum.

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