There's no doubt about it, $995 billion market cap Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) is a huge company. Iconic CEO Warren Buffett, often called the Oracle of Omaha, has been clear about the future prospects of the conglomerate he oversees. But the massive cash pile he is growing as he takes profits in select stock investments suggests that something big could be on the horizon.
What does Berkshire Hathaway do?
Berkshire Hathaway is a holding company that usually gets lumped into the finance sector. That's not a great fit, however, because the businesses it owns range from insurance to utilities to pipelines to trains to retail to manufacturing to chemicals, just to name a few. In many ways, it is probably best to think of the company as something akin to a mutual fund.
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Investors buy Berkshire Hathaway so they can invest alongside Warren Buffett. His investment approach is a mixture of value investing and growth investing, as he generally looks to buy good companies when they are out of favor. That's a simplification, of course, but it is fairly accurate from a big-picture perspective. The difference between Berkshire Hathaway and a mutual fund is that a mutual fund has to pass dividends and capital gains on to investors while Berkshire Hathaway does not.
Keeping the dividends he collects and the capital gains he generates in-house allows Buffett to invest in new businesses. Thus, he can grow Berkshire Hathaway as a company, effectively compounding the returns Berkshire can generate. This has been an incredibly successful approach, noting that a lot of the success has to be attributed to Buffett's investment choices.
The future won't be as bright as the past for Berkshire Hathaway
That said, it is much harder to make acquisitions that move the growth needle at a gigantic company than it is at a smaller company. And Berkshire Hathaway is now a gigantic company. Buffett was very clear in the company's 2023 annual report:
There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can't. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.
That sounds terrible, but it has to be put into context. The S&P 500 index trades near all-time highs. Valuations at plenty of companies are stretched right now and there are likely few really attractive options. Which is why cash is piling up on Berkshire's balance sheet. In fact, Buffett has been taking profits in Apple and Bank of America, which suggests that there's even more cash headed to the balance sheet in the quarters ahead.
BRK.A Cash and Short Term Investments (Quarterly) data by YCharts
Why is Buffett doing this? It could be that he's just taking profits in successful investments and there's no more to read into it. Or it could be that he's worried the market is nearing a peak and he wants to lock in his gains. Or he could be locking in gains in preparation for a bear market that will open up the investment opportunities that are lacking in the current market environment.
What could Buffett buy with $277 billion?
There are some interesting facts to consider. The smallest stock in the S&P 500 index is roughly $6 billion. The largest is $3.4 trillion. The average market cap is $105 billion while the median is around $37 billion. What all of this tells you is that while there are a small number of very large companies in the S&P 500, there are a lot of companies that are smaller than the $277 billion cash balance Buffett is sitting on. In many ways, the world is his oyster if he finds something he likes. There are thousands of companies he could buy if he wanted to.
The most obvious places to look would be sectors in which he already has a significant presence. The four sectors that are specifically broken out in Berkshire Hathaway's financial statements are insurance, utilities, pipelines, and trains. But Buffett has been pretty clear that he's no longer fond of the utilities sector because of wildfire risks. And buying a sizable train company would likely end up creating antitrust issues. So those two are probably out.
That leaves insurance and pipelines as big opportunities. The largest insurance company in the iShares U.S. Insurance ETF is Progressive, with a market cap of roughly $150 billion. The second and third largest are Chubb and Aflac(NYSE: AFL), sporting market caps of $117 billion and $64 billion, respectively. In other words, Buffett could buy just about any insurance company he wants. That said, Aflac has an interesting and reliable business model of selling what's best described as supplemental insurance that has allowed it to increase its dividend for 42 consecutive years. It could be an interesting fit within Berkshire Hathaway.
The same opportunity issue is true in the pipeline sector, where the companies are even smaller. For example, industry bellwethers Kinder Morgan(NYSE: KMI) and Enterprise Products Partners(NYSE: EPD) have market caps of $50 billion and $64 billion, respectively. Both of these pipeline giants have notable insider ownership and produce the types of reliable cash flows Buffett tends to favor. Canada's Enbridge(NYSE: ENB), with a market cap of $89 billion, could also be bought, but it would bring with it natural gas utilities, which might not be desirable to Buffett as he reconsiders the utility sector. That said, his big concern with utilities is really on the electric side, so Enbridge isn't a hard no.
It will be big if something happens
Berkshire Hathaway has its fingers in so many pies that it is really impossible to predict what Buffett will actually do. But it is almost certain to be a large transaction if he's going to move the needle on the top and bottom lines. That requires him to buy one of the largest players in the sector he chooses. Given the company's already material presence in insurance and pipelines and the notable and interesting companies in those sectors, it seems like there could be attractive opportunities for him in both areas. Aflac would be on my radar and so would Kinder Morgan, Enterprise Products Partners, and even Enbridge.
But there's another choice that should be in the mix here, too. And it would be even bigger than an acquisition. Buffett, whose reign atop Berkshire Hathaway is drawing to a close, could decide that it is time for the company to start paying a dividend. Now that would be a truly shocking turn of events.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Enbridge, Kinder Morgan, and Progressive. The Motley Fool recommends Aflac and Enterprise Products Partners. The Motley Fool has a disclosure policy.
