What Berkshire Hathaway's cash balance means for future deals

In Berkshire Hathaway's (BRK-A, BRK-B) first letter to shareholders since Vice Chair Charlie Munger's death in November 2023, Chairman and CEO Warren Buffett reported record annual profits and fourth-quarter cash balances.

Morningstar Senior Stock Analyst and Strategist Greggory Warren joins Yahoo Finance Live to discuss the biggest takeaways from Berkshire Hathaway's fourth-quarter earnings figures.

"We've been a little bit less concerned about that cash balance creeping up past $150 billion than we thought we would be, but that's because they're earning a lot on that right now," Warren says. "From that perspective, it's an interesting period for Berkshire right now and it has been for a number of years, because they've just not been able to find good enough deals to put the money to work in."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

BRAD SMITH: Shares of Berkshire Hathaway rising premarket after the Saturday release of Warren Buffett's annual letter to Berkshire Hathaway shareholders. The company reported record profits in 2023, as well as cash holdings that hit a record for the fourth quarter.

It is the company's first report since the passing of its vice chair Charlie Munger. For more on this, we turn to Greggory Warren, who was the Morningstar strategist and senior stock analyst. Thanks so much for taking the time here. This morning, Greggory.

Let's talk about some of the records that we saw come in for Berkshire Hathaway. The record cash balance, the profit here. What is most significant as this company really repositioned some of its largest investments and really looks across where there are moats, regardless of the economic environment?

GREGGORY WARREN: Well, I think Berkshire's been in a conundrum for quite some time now. Buffett gets credit. Buffett and Munger both, when he was still with the firm. Got credit over the years for being very, very disciplined, especially when it looked to acquisitions.

So they weren't out there chasing a lot of deals just to put money to work. And the byproduct of that is they've had a lot of cash build up on the balance sheet. If we look back at the past five years, they were generating around $25.5 billion a year in free cash flow. And that's their cash flow from operations less the capital expenditures.

So beyond the regular money they were putting to work on CapEx, they were still churning out a ton of cash. And it's really hard to dispense of all that capital every year. And for a while there, they were able to offset some of that with share repurchases. But the past couple of years, it's been harder and harder because the valuation on the firm has gotten higher and higher.

So it's been a difficult situation for Berkshire to be in. We were concerned. A few years back, Buffett had made the comment that he couldn't sit here with a $150 billion in cash and pretend to shareholders that it was something brilliant. But back when he said it in 2017, short-term rates were at zero. Now, they're at 5% plus.

So we've been a little bit less concerned about that cash balance creeping up past $150 billion than we thought we would be. But that's because they're earning a lot on that right now.

So from that perspective, it's an interesting period for Berkshire right now. And it has been for a number of years, because they've just not been able to find good enough deals to put the money to work in, which begs the question, is a dividend at some point coming? Should share repurchases be ramped up? I know Buffett's answer to that. But I think that that's something that the next guys who run the firm are really going to have to address when they take over.

SEANA SMITH: And what's your expectation there, Greggory?

GREGGORY WARREN: Well, I think longer term, I know Buffett's been really against the dividend, overall, because his thought is, we could do better with this cash than most investors. And once you start a commitment to that dividend, You have to stick to it. And I understand both of his arguments. But I think he's also really leaving that as a tool for the next management team, because he doesn't want to commit them to something that they may not be able to maintain over a long, long time frame.

But it also gives those guys that ability. Greg Abel's, at this point, the heir apparent, to be able to step in and go to shareholders and say, look, I'm not Warren. I'm not Charlie. We have a ton of capital on the books right now. We want to start giving it back to shareholders in incremental amounts.

This is how we're going to start doing it. Give us time to show you that we can still run this business the way it has, because I think that was one of the more interesting things that came out of the annual letter.

And it was something we've been saying about Berkshire for a long time, Buffett referred to Charlie as the architect of the firm and the general contractor. And in a lot of ways, Berkshire has been set up as this decentralized organization that runs itself.

So even if Warren and Charlie are no longer there at the helm, the business should continue to run as it has historically, where Warren and Charlie's benefits came into play was on the capital allocation front.

And I think what's going to happen is once Warren's gone, it's going to be harder for management to say, we're going to hold on to all this cash.