Huge Cash Reserves
What’s particularly unique about Berkshire Hathaway is that it has amassed an enormous cash pile of $84.8 billion. With the exception of a few large banks, no other publicly traded company in the US has a bigger cash hoard. This has put Berkshire Hathaway in a great position to use its cash reserves to boost shareholder value by making large acquisitions. Berkshire Hathaway has frequently said that it would keep at least $20 billion of cash reserves to meet any unforeseen insurance losses. This means that the conglomerate can use up to $64.8 billion for acquisitions.
There are dozens of major companies that could be on Warren Buffett’s radar, ranging from food company General Mills, Inc. (NYSE:GIS) valued at $36 billion to discount retailer Dollar General Corp. (NYSE:DG) valued at $20.5 billion. Rumors are also abound that the Oracle of Omaha backed Kraft Heinz Co (NASDAQ:KHC), which is Berkshire Hathaway’s largest stock position, could make a bid for snack giant Mondelez International Inc (NASDAQ:MDLZ) valued at almost $65 billion, although these might just be rumors since Buffett himself ruled out the possibility (3) of a Mondelez deal in mid-2015.
In addition to this, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) can also deploy the cash reserves on expanding its stock portfolio. The company could, for instance, load up on additional shares of Apple Inc. (NASDAQ:AAPL). The technology company became a part of Berkshire Hathaway’s stock portfolio last year, and it’s still a fairly small position, representing just 1.3% of the portfolio. Thanks to its large size, Apple can’t grow rapidly anymore. But Berkshire Hathaway might still like Apple since it generates strong and reliable levels of free cash flows, which are still growing at double-digit rates, and is expanding rapidly in the higher-margin services space.
The company has recently said that it is eyeing record sales of $77 billion for the holiday quarter; and if the US economy expands under Trump, then Apple might witness an even better holiday season in 2017. Apple also pays a decent dividend yield of around 2% which will likely continue growing in the foreseeable future. Apple’s shares are priced just 13-times this year’s earnings estimates, as per consensus data from Thomson Reuters.
Bottom-line
Shares of Warren Buffett’s Berkshire Hathaway outperformed in 2016. The company’s performance will likely improve meaningfully in 2017 on the back of rising interest rates and Donald Trump’s pro-growth policies. On top of this, Berkshire Hathaway can also use its cash pile to boost shareholder value by making acquisitions or expanding its stock portfolio. therefore, I believe the conglomerate’s shares will continue to do well in 2017.
The article 3 Reasons Why Berkshire Hathaway Inc (BRK.B) Stock Will Rally in 2017 originally appeared on amigobulls.com. Watch our analysis video on BRK.A
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Additional Links:
(1) http://beta.morningstar.com/videos/771407/Bank-of-America-Is-Best-Positioned-for-Rate-Increase.html
(2) http://www.npr.org/2017/01/01/507799152/coal-miners-hope-trump-will-help-struggling-industry
(3) http://blogs.wsj.com/moneybeat/2015/08/10/warren-buffett-throws-cold-water-on-mondelez-deal-talk/
