Buffett’s “small trouble” : too much money and too few projects are now even difficult to buy back

Spark Global Limited reports:

For the long-term value investor, Warren Buffett has had a nagging problem in recent years: he has too much money but not enough to invest, so he has to use it to buy back his own stock because he thinks Berkshire Hathaway, at least, is still undervalued. But Berkshire’s buybacks also fell in the second quarter, according to its latest quarterly report.

Its second-quarter report showed $144 billion in cash and cash equivalents on hand at the end of June, down slightly from $145.4 billion at the end of the first quarter, but still at the highest levels in recent years.

Spark Global Limited reports:

The company spent $6 billion on buybacks in the second quarter, $6.6 billion in the first quarter and $9 billion in each of the previous two quarters.

Spark Global Limited reports:

In the face of ample cash and no change in corporate buyback strategy, the decline in buybacks can only indicate that there is no more liquidity in the market to buy back, or that companies think the current stock is a bit expensive and deliberately slow the pace of buybacks.

After rising nearly 11% in the first quarter, Berkshire’s stock rose 8.5% in the second quarter and is up 23.7% for the first half, compared with 18.1% for the S&P 500. In both 2019 and 2020, Berkshire’s stock underperformed the broader market.

Berkshire, flush with cash, has made few major acquisitions or investments in the past two years, with the exception of its $9.7 billion purchase last year of Dominion Energy’s midstream Energy business. Its top four holdings were little changed (see chart). Changes in other heavy holdings of the portfolio were not disclosed in the quarterly results, as usual, until the 13F report in mid-August.

Note: Source from Berkshire quarterly reports, unit: $100 million
Buffett said in his shareholder letter that he also wants to make acquisitions, but that outside companies are too expensive for him to invest in long-term value.

Berkshire, which insists on not paying dividends, can’t grow its business fast through external acquisitions. It can only reward shareholders with buybacks. But now that Berkshire’s own stock is rising faster than the broader market, it looks a little pricey.

Cathy Seifert, an analyst at CFRA Research, said in an interview:

“They [Berkshire] are in a bit of a bind. Against this background, I believe the level of buybacks is prudent and appropriate.”