How Buffett might spend his cash

The billionaire investor has a variety of options for the mountains of money Berkshire Hathaway has amassed.

By TheStreet Staff Jan 28, 2011 1:33PM

Image: Cash (© MedioImages/Jupiterimages)

 

Improving market conditions have been a major benefit for Warren Buffett, who has remained bullish through this long, arduous global economic recovery.

 

Now the Omaha, Neb., native is sitting on a mountain of cash, leading many analysts, commentators and fans to speculate about what the world's third-richest man might do with it. According to a Sept. 30 filing, Berkshire Hathaway (BRK.A) has $34.46 billion in cash.

 

Buffett is unlikely to stand by and watch his money pile up, saying in the past that he doesn't favor cash as a long-term investment.

 

In an interview on "The Charlie Rose Show," Buffett insisted that although Berkshire Hathaway always has enough cash, he sees cash as a bad long-term investment. He said he's usually unhappy when he finds excess cash.


Likening cash to oxygen, the legendary investor said it is important to have cash but unnecessary to have it in excess. Rather than hoard cash, he would rather own a strong business.

 

A more likely scenario is that Buffett's massive reserves will be used to fund big-ticket purchases. Although the investor has tweaked the positions within his legendary investment portfolio, he has not made a major purchase since Berkshire Hathaway bought the remaining shares of Burlington Northern Santa Fe Railroad more than a year ago.

Finding a suitable purchase is not easy for the investor. The Burlington Northern purchase highlights the challenges Buffett faces when seeking out opportunities.

 

The pool of attractive investment opportunities has shrunk significantly as his company has grown. Today, in order for a company to affect Berkshire's performance significantly, it must be large. The small, fast-moving companies that earned staggering returns in the past would barely boost Berkshire.

 

The financial news wires are buzzing this week in response to a recent Buffett-related article in Barron's that said a dividend may be in the future for Berkshire Hathaway shareholders. Citing the company's massive surplus of funds and the challenge of finding attractive acquisition targets, the author notes that a dividend could be one logical way for the company to use its cash.

 

Although Berkshire Hathaway has not traditionally paid a dividend, Buffett is no stranger to distributions. The investor's investment portfolio is loaded with notable income-paying positions such as Proctor & Gamble (PG), Johnson & Johnson (JNJ) and Coca-Cola (KO). The investors' personal investment portfolio also boasts exposure to a number of yield-bearing companies that have provided him with a comfortable payout in recent years.

 

Still, many observers have said Berkshire Hathaway and Buffett might face tax issues if they offer a dividend.

These are only a few of Buffett's available options, and ultimately it remains unclear how he will eventually choose to spend Berkshire Hathaway's cash. Given the size of his available funds, it will be exciting to see the route he chooses.

 

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