March 1, 2011
Buffett To Ben: Thank You Sir, May I Have Another?

Warren Buffett’s annual letter/report confirmed that Berkshire has adopted a more defensive stance with regards to equities.  To be sure, last year Berkshire’s outstanding share count jumped by 6.1%, tangible equity increased by 9.5%, and the company’s cash hoard skyrocketed by 23%. Nothing explains this disproportionately large cash hoard other than the fact that Buffett cannot find enticing equity/acquisition opportunities.

Not convinced by the data, the media preferred to focus on a couple of quotes:

“We’re prepared [for acquisitions].  Our elephant gun has been reloaded, and my trigger finger is itchy.”

As the ‘elephant gun’ and ‘itchy’ ‘trigger finger’ quotes made the rounds, it was widely reported that Buffett’s interest in making a major acquisition was boosting stock prices.  It was also reported that Buffett called a bottom in U.S. home prices [he did not] and that Buffett was eying a domestic acquisition [we shall see].

Incidentally, unless you are buying an existing Buffett holding that you think Berkshire will continue to accumulate, the idea of trying to front-running a Buffett acquisitions doesn’t make a lot of sense. After all, if you could actually discover a ‘forever’ holding that is trading at attractive prices, you would be buying it regardless of what Buffett may or may not do, but I digress.

A more lengthy quote from the letter suggests that Buffett is, as he always does, lining up potential candidates, but that he will require some ‘luck’ to be able to pull the trigger. It is difficult to infer anything else from the word ‘luck’ than more attractive prices:

“At yearend we held $38 billion of cash equivalents that have been earning a pittance throughout 2010. At some point, however, better rates will return. They will add at least $500 million – and perhaps much more – to our investment income. That sort of increase in money-market yields is unlikely to come soon. It is appropriate, nevertheless, for us to include improved rates in an estimate of “normal” earning power. Even before higher rates come about, furthermore, we could get lucky and find an opportunity to use some of our cash hoard at decent returns. That day can’t come too soon for me: To update Aesop, a girl in a convertible is worth five in the phone book.”

Not convinced that Buffett is waiting rather than about to pull the trigger?   Consider that one stock Mr. Buffett continues to accumulate, Wells Fargo, is being purchased primarily on the expectation of a dividend hike. And yes, one quote not receiving a lot of coverage, was Mr. Buffett’s passing mention of his friend (‘in respect to Goldman’), the Federal Reserve.  Buffett appears of the mind that the Fed will clear the way for a Wells Fargo div increase relative soon (March 21?).

“In addition, dividends on our current common stock holdings will almost certainly increase. The largest gain is likely to come at Wells Fargo. The Federal Reserve, our friend in respect to Goldman Sachs, has frozen dividend levels at major banks, whether strong or weak, during the last two years. Wells Fargo, though consistently prospering throughout the worst of the recession and currently enjoying enormous financial strength and earning power, has therefore been forced to maintain an artificially low payout. (We don’t fault the Fed: For various reasons, an across-the-board freeze made sense during the crisis and its immediate aftermath.)

At some point, probably soon, the Fed’s restrictions will cease. Wells Fargo can then reinstate the rational dividend policy that its owners deserve. At that time, we would expect our annual dividends from just this one security to increase by several hundreds of millions of dollars annually.”

As always, a must read: Buffett 2010 Letter2010 10K
Shares End the Month With Gains, Helped by Buffett’s Comments BL
Going on Safari With Warren Buffett WSJ

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