Tuesday, May 19, 2009

Berkshire Scales Back Stock Purchases as Cash Erodes

Warren Buffett’s Berkshire Hathaway Inc., the largest shareholder in Kraft Foods Inc. and Coca-Cola Co., is scaling back stock purchases after the firm’s cash holdings fell to their lowest in more than five years.

Berkshire is spending less as the firm comes closer to the $10 billion that Buffett says is the minimum he wants on hand to protect against calamity. The cash hoard, which had been at $47.1 billion in September 2007, fell below $20 billion in April after the company posted its worst loss in at least 20 years and Buffett directed funds to corporate debt and preferred stock.

“He’s tapped out,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of hedge fund Ram Partners LP. “He had to sell some of his stocks to buy stuff last fall. That’s why he’s not been making big stock purchases.”

Berkshire spent $624 million on equities including Wells Fargo & Co. in the first quarter, the smallest amount since at least 2005, according to regulatory filings by the Omaha, Nebraska-based company.

Buffett is instead locking in returns of 10 percent or more by investing in preferred shares of Goldman Sachs Group Inc. and General Electric Co. and buying similar securities sold by Swiss Reinsurance Co. He’s also purchased debt in companies including candy manufacturer Mars Inc. and wallboard maker USG Corp. Such deals since September collectively pay interest of more than $1.8 billion annually.

“Berkshire, basically, every month generates cash,” Buffett said at a press conference May 3, the day after the annual shareholder meeting in Omaha. “We have not been buying a lot of equities.”

Locking in Returns

The Goldman Sachs and GE investments also give Buffett the option to buy stock at prices set when the deals were consummated. The Swiss Re and USG purchases are among those that may convert to stock later.

“How can you turn something like that down,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington who has studied Buffett’s investing history. “He’s hedging in the right way. He’s buying these things in a period of uncertainty and locking in the return until the stocks recover.”

Berkshire spent an average $2.9 billion on stocks per quarter in the 16 periods ended Dec. 31. The only time in that span when Berkshire invested less than $1 billion was the fourth quarter of last year, when the firm paid $691 million for equities and sold shares of companies including Procter & Gamble Co., Johnson & Johnson and oil producer ConocoPhillips for $4.77 billion.

Higher Threshold

Buffett told shareholders in February that he sold the three stocks -- which he “would have preferred to keep” -- to fund the investments in Goldman Sachs and GE. Berkshire had almost $20 billion in cash after buying preferred shares in Dow Chemical Co. in April to help the company acquire Rohm & Haas Co., Buffett said this month.

“Frankly, when we had $45 billion around, the threshold wasn’t as high for the first deal,” Buffett said in a Bloomberg Television interview in March. “The threshold has to be higher now.”

Buffett said this month that Berkshire was also scaling back on property insurance coverage because of cash limitations. Berkshire typically gets about half its profit from insurance operations, protecting clients against disasters including hurricanes.

‘Excess Capital’

“We don’t have as much excess capital as we had a couple years ago, so we cut back somewhat on the insurance risk we take,” he said at the press conference. Berkshire posted profit declines every quarter in 2008 and then a $1.53 billion deficit in the first quarter as the company sold ConocoPhillips shares at a loss and paid $675 million on derivatives tied to indexes of corporate bonds.

Derivative linked to equity markets weighed on Berkshire’s results last year. The contracts commit Berkshire to pay out on dates beginning in 2019 if specified stock indexes in U.S., Asia and Europe are lower than they were when the bets were made. Buffett, 78, sold some of the derivatives near the market’s peak in 2006 and 2007, and liabilities on the contracts widened to $10.2 billion as of March 31.

Berkshire slipped $320, or 0.4 percent, to $91,680 at 9:38 a.m. in New York Stock Exchange composite trading. The shares have dropped about 26 percent in the past 12 months. Buffett didn’t respond to a request for comment left with assistant Carrie Kizer.

Some of the largest equity holdings in Berkshire’s U.S. portfolio, valued at $40.9 billion as of March 31, have plunged in the past year. American Express Co. declined 47 percent, ConocoPhillips slumped 50 percent and Burlington Northern Santa Fe Corp. has fallen 36 percent.

U.S. Bancorp

Buffett, named the world’s second-richest person by Forbes magazine, makes most of the investment decisions at Berkshire, while Lou Simpson, 72, manages the portfolio for car-insurance unit Geico Corp. Buffett has cautioned against assuming all moves in the equity portfolio are his.

Buffett’s firm, the largest shareholder in San Francisco- based Wells Fargo, increased its stake in the bank by about 4.3 percent in the first quarter to 302.6 million shares, and boosted holding of Minneapolis-based U.S. Bancorp by about 2.2 percent. Berkshire also bought back shares in Johnson & Johnson, the largest maker of health-care products, and increased its stake in Union Pacific Corp., the second-biggest U.S. railroad.

Berkshire lowered holdings in UnitedHealth Group Inc., the top U.S. health insurer by sales, and CarMax Inc., the biggest U.S. used-car dealer.