Cash advanced 7.5 percent to $40.7 billion in the three months ended June 30, the Omaha, Nebraska-based company said in an Aug. 3 regulatory filing. Berkshire was a net seller of equities in the quarter as it cut its allocation to companies that make and distribute consumer goods while boosting holdings of financial firms and a group called “commercial, industrial and other.” Individual stocks weren’t listed in the filing.
“Why keep his old names that served a purpose for a while and have gone up,” Tom Russo, a partner at Berkshire investor Gardner Russo & Gardner, said in a phone interview. Some of the consumer stocks “have various forms of blemishes.”
Buffett, 81, has cited challenges at consumer-products firms in Berkshire’s $86.2 billion stock portfolio, including Johnson & Johnson (JNJ), Procter & Gamble Co. (PG) and Kraft Foods Inc. (KFT) The billionaire has used his cash to build the largest stakes in firms including Wells Fargo & Co. and to expand Berkshire through acquisitions.
He has said he looks for one good buyout idea annually and told investors at his May shareholder meeting that he couldn’t come to an agreement on a potential acquisition valued at about $22 billion. Berkshire hasn’t struck a deal larger than $1 billion since its 2011 purchase of engine-additives maker Lubrizol Corp. for about $9 billion.
The extra cash adds to the ability to make an acquisition on-par with Berkshire’s largest takeover, the 2010 purchase of railroad Burlington Northern Santa Fe for $26.5 billion, said Buffett biographer Andrew Kilpatrick.
“If an elephant comes along, he will fire,” Kilpatrick said by phone. “He’s fully equipped to do something enormous.”
Berkshire sold $3.01 billion in equities in the second quarter, while purchasing $1.85 billion in stock, according to the filing. The cost basis of the consumer portfolio slipped to $9.84 billion from $12.3 billion.
The figure for the financial-firm holdings climbed to $17.7 billion from $17.1 billion, and the commercial-industrial group advanced to $23.7 billion from $23.3 billion. The data show that Buffett probably isn’t building another large stake, as he did last year with International Business Machines Corp. (IBM), Kilpatrick said.
Buffett pared Berkshire’s Kraft holdings in 2010 and continued to cut it in four consecutive quarters to 78 million shares through March 31, according to regulatory filings. The billionaire called the foodmaker’s takeover of Cadbury Plc and the sale of its pizza brands in 2010 “dumb” at Berkshire’s shareholder’s meeting that year. Kraft has advanced 37 percent since his remarks through Aug. 3 to $40.51.
The billionaire held 29 million J&J shares as of March 31, down from 42.6 million at the end of 2010. The New Brunswick, New Jersey-based maker of health-care products advanced 5.4 percent this year to $69.12 on Aug. 3.
J&J was ordered in April to pay more than $1.1 billion in fines after an Arkansas jury found the firm misled doctors and patients about the risks of antipsychotic medication Risperdal. The company has also struggled with recalls of artificial hip implants and over-the-counter medicines.
“It’s still got a lot of wonderful products and it’s got a wonderful balance sheet and all of that, but there have been too many mistakes,” Buffett told CNBC in a Feb. 27 interview.
Berkshire reduced its holdings of P&G by 4.6 percent in the first quarter to 73.3 million shares. The maker of Gillette razors and Tide laundry detergent has had difficulty raising prices for some products as consumers consider less expensive alternatives, Buffett told the cable news station in May. The stock is down 1.8 percent this year to $65.50 on Aug. 3.
P&G Chief Executive Officer Robert McDonald is working to prove that his pricing and plan to cut cost cuts will be enough to improve results. Last month, Bill Ackman’s Pershing Square Capital Management LP took a $1.8 billion stake in P&G, and people familiar with the matter said he plans to push for leadership changes.
Buffett’s firm has until next week to file a list of its U.S. equity holdings as of June 30 with the Securities and Exchange Commission. Representatives for J&J, Kraft and Cincinnati, Ohio-based P&G declined to comment. Buffett didn’t return a message left with an assistant.
Buffett probably didn’t cut his stake in Atlanta-based Coca-Cola Co. (KO), Berkshire’s largest holding, according to Russo. The billionaire said in June that he added to a stake in Wal- Mart Stores Inc. (WMT) The retailer plunged to $57.36 in April after the New York Times said the company bribed Mexican officials to speed expansion.
Wal-Mart was “very attractive compared to other big companies” when the price was $58 or $59, Buffett told Betty Liu in a July 13 interview on Bloomberg Television. The retailer climbed to $74.55 on Aug. 3.
Some of the extra cash may be distributed to Ted Weschler and Todd Combs, former hedge fund managers whom Buffett hired in the past two years to help oversee investments, said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. Buffett told Liu last month that his deputies will probably oversee about $4 billion apiece, compared with $2.75 billion at the beginning of this year.
Buffett may also use the funds to exit some derivatives bets, Kass said in a phone interview yesterday. Berkshire struck a deal after June 30 to cancel about half of the $16 billion in notional protection it sold against municipal and state bond defaults, according to the filing. Buffett’s firm may have to pay the counterparty to retire the obligations, Kass said.
Derivatives bets have made Berkshire’s earnings more volatile, because they’re marked to market. Net income slid 9 percent in the second quarter to $3.11 billion on widening losses from separate derivatives tied to equity markets. Operating earnings, which exclude some investment results, climbed on gains at the railroad and insurance units.
Buffett wrote in a February letter to shareholders that new rules around collateral have made derivatives less attractive. The wagers will probably shrink under the company’s next leaders, he said at the annual meeting in May.
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