You'll Be Surprised at the Size of Berkshire Hathaway's War Chest

By Alex Dumortier, CFAMarketsFool.com

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$84.8 billion. That's the total amount of cash and cash equivalents on Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) had quietly amassed on its balance sheet by the end of September. No publicly traded U.S. company has a larger cash hoard. Not Apple, nor Google parent Alphabet -- no one.

(Strictly speaking, that isn't true, but the only companies that are ahead of Berkshire on this measure are a few large banks, including Bank of America and Goldman Sachs Group. We should exclude banks from the comparison, because they have a very specific business model that demands a lot of leverage.)

Free money: Understanding insurance float

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In fact, Berkshire's cash is not entirely unencumbered: Remember that one of the company's significant business lines is insurance. At the end of September, Berkshire's insurance operations had invested assets totaling nearly $190 billion, of which $50.2 billion were in cash and cash equivalents. Part of these invested assets represent shareholder capital, including retained earnings, but approximately $91 billion derive from insurance float, i.e. liabilities.

If you're not familiar with the concept of float, here is how Warren Buffett defined it in his 2004 shareholder letter:

As such, float is a "net liability" -- basically, the liability created by an open insurance contract net of the premiums received. However, it's an unusual form of liability that has some attractive properties for the company that bears them. As Buffett explained in his 2015 shareholder letter (emphasis is mine):

The elephant gun is loaded

The very fact that float dollars "will never leave the premises" is what has enabled Berkshire to invest some of the float. The bulk of its public equities portfolio is housed within its insurance operations, for example. Nevertheless, Buffet has said repeatedly that he would not allow Berkshire's cash position to fall below $20 billion -- an amount he considers sufficient to cover large, unexpected insurance losses.

Even after you account for that buffer, however, Buffett's "elephant gun" is well-loaded, with ammunition to spare. (In his lingo, "elephants" are large acquisitions.) Subtract $20 billion from the $84.8 billion cash position leaves you with $64.8 billion -- an amount that is greater than the individual market capitalizationsof more than 85% of the companies in the S&P 500.

Ready, aim, ... wait.

What are some possible acquisition candidates? Earlier in the week, I profiled 3 "Warren Buffett" companies: Infant formula manufacturer Mead Johnson Nutrition (market capitalization: $13.3 billion), lubricants specialist Valvoline ($4.2 billion) and ceiling products manufacturer Armstrong World Industries ($2.3 billion). However, they aren't elephants and they might not all be cheap enough for Buffett's taste. (He has to pay a premium for control, after all.) For size and quality, industrials Parker-Hannifin ($19.1 billion) and FANUC ($35.2 billion) fit the bill, but they don't look quite cheap enough, either.

With equity valuations looking a bit rich, it's no surprise that Berkshire Hathaway's war chest has continued to grow. For Buffett-watchers like this Fool, it's great fun to try and anticipate how he will next deplete it (and try to understand his choices, once they are known).

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.