Berkshire cash hoard swells as Buffett pares consumer stocks

Berkshire Hathaway Inc.'s cash reserve swelled in the second quarter to its highest level in a year as chairman Warren E. Buffett pared bets on consumer products stocks.

Its cash holding advanced 7.5% to $40.7 billion during the quarter, the company said in an Aug. 3 regulatory filing.

Berkshire Hathaway 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” in the filing. Individual stocks weren't listed.

“Why keep his old names that served a purpose for a while and have gone up?” said Tom Russo, a partner at Berkshire Hathaway investor Gardner Russo & Gardner.

Some of the consumer stocks “have various forms of blemishes,” Mr. Russo said.

Mr. Buffett has cited challenges at consumer products firms in Berkshire Hathaway's $86.2 billion stock portfolio, including Johnson & Johnson (JNJ), Kraft Foods Inc. (KFT) and Procter & Gamble Co. (PG). The billionaire has used his cash to build large stakes in firms such as Wells Fargo & Co. (WFC) and to expand Berkshire Hathaway through acquisitions.

BUYOUT IDEAS

Mr. Buffett has said that 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 Hathaway 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 Hathaway's largest takeover, the 2010 purchase of railroad Burlington Northern Santa Fe for $26.5 billion, Buffett biographer Andrew Kilpatrick said.

“If an elephant comes along, [Mr. Buffett] will fire,” Mr. Kilpatrick said. “He's fully equipped to do something enormous.”

Berkshire Hathaway 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 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 Mr. Buffett probably isn't building another large stake, as he did last year with IBM, Mr. Kilpatrick said.

Mr. Buffett pared Berkshire Hathaway'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 food maker's takeover of Cadbury PLC and the sale of its pizza brands in 2010 “dumb” at Berkshire Hathaway's shareholders' meeting that year.

Following his remarks, Kraft advanced about 37% through Aug. 3.

Mr. Buffett held 29 million J&J shares as of March 31, down from 42.6 million at the end of 2010. The maker of health care products advanced 5.4% through Aug. 3.

Johnson & Johnson was ordered in April to pay more than $1.1 billion in fines after an Arkansas jury found that the company misled doctors and patients about the risks of the antipsychotic medication Risperdal.

The company also has 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,” Mr. Buffett told CNBC in a Feb. 27 interview.

Berkshire Hathaway reduced its holdings of Procter & Gamble by 4.6% 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, Mr. Buffett told CNBC in May.

The stock was down 1.8% for the year through Aug. 3.

Procter & Gamble chief executive 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 Procter & Gamble, and people familiar with the matter said that he plans to push for leadership changes.

Berkshire Hathaway has until this week to file with the Securities and Exchange Commission a list of its U.S. equity holdings as of June 30.

Representatives for Johnson & Johnson, Kraft and P&G declined to comment.

Mr. Buffett didn't return a message left with an assistant.

The billionaire probably didn't cut his stake in Coca-Cola Co. (KO), Berkshire Hathaway's largest holding, according to Mr. Russo.

Mr. Buffett said in June that he had added to a stake in Wal-Mart Stores Inc. (WMT).

The retailer plunged to $57.36 in April after The New York Times reported that the company allegedly had bribed Mexican officials to speed expansion.

Wal-Mart was “very attractive compared to other big companies” when the price was $58 or $59, Mr. Buffett said in an interview with Bloomberg Television.

Shares of the retailer had climbed to $74.55 as of Aug. 3.

Some of the extra cash may be distributed to Todd Combs and Ted Weschler, former hedge fund managers whom Mr. 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.

Mr. Buffett told Bloomberg Television last month that his deputies probably will oversee about $4 billion apiece, compared with $2.75 billion at the beginning of this year.

DERIVATIVES BETS

Mr. Buffett also may use cash to exit some derivatives bets, Mr. Kass said.

Berkshire Hathaway struck a deal after June 30 to cancel about half the $16 billion in notional protection it sold against municipal and state bond defaults, according to the filing.

The company may have to pay the counterparty to retire the obligations, Mr. Kass said.

Derivatives bets have made Berkshire Hathaway's earnings more volatile because they are marked to market.

Net income slid 9% 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.

Mr. Buffett wrote in a February letter to shareholders that new rules around collateral have made derivatives less attractive.

The wagers probably will shrink under the company's next leaders, he said at the annual meeting in May.