By Nicole Friedman and Daniel Kruger
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 24, 2018).
Berkshire Hathaway Inc. shareholders will look to Warren Buffett's annual letter on Saturday for new clues of what the conglomerate plans to do with more than $100 billion in cash.
There is little mystery about who is getting that money meanwhile: Uncle Sam.
Berkshire has used its mounting cash pile to become one of the world's largest owners of U.S. Treasury bills after struggling to find big companies to buy in recent years.
It held $109 billion in cash as of Sept. 30, up from $86 billion at the end of 2016 and more than double what it had at the end of 2006. Nearly all of that was invested in short-term bills, according to Mr. Buffett.
Berkshire has an outsize presence in the $2 trillion market for Treasury bills, a type of government debt that matures in a year or less. It held more bills around the end of the third quarter than large countries such as China and the U.K. It also had more at that time than the $13.5 billion held collectively by a group of 23 primary bond dealers that are obligated to underwrite U.S. government debt sales.
Berkshire's holdings are big enough that when bond dealers need bills for a specific date, they will come to Berkshire and arrange a trade, Mr. Buffett said.
"We're the ones they call. We've got the best inventory," Mr. Buffett said in a 2017 interview with The Wall Street Journal. "That's a new sideline for us here."
Shortages of Treasury bills have been a particular problem for bond dealers and investors at recent points. When the U.S. government approached its debt ceiling in recent years, the government was sometimes forced to sell fewer bills, making them scarce in the market. A recent budget deal pushed back the next debt-ceiling showdown until March 2019.
The Omaha, Neb., billionaire uses his widely read annual shareholder letter to recap Berkshire's results and discuss broader financial themes. He typically says little about where he could turn next for an acquisition, although he has acknowledged in other settings that pressure is mounting for Berkshire to find better uses for its massive cash holdings.
Those holdings grew by an additional $3.3 billion last week when Phillips 66 repurchased 35 million of its shares from Berkshire.
"There's no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more, and we think we're doing something brilliant by doing it," he said at Berkshire's annual meeting last May. "I would say that history is on our side, but it would be more fun if the phone would ring."
Berkshire hasn't made a major buy since it agreed to acquire aerospace manufacturer Precision Castparts Corp. in 2015 for more than $32 billion, its biggest deal ever. A deal last year to buy Texas power-transmission company Oncor for $9 billion in cash was terminated after Oncor's parent company got a higher offer.
Mr. Buffett has long resisted using cash to pay a dividend, partly because of the tax consequences for shareholders. He has said the company would buy back stock if its price falls below 120% of book value. Both classes of Berkshire stock traded Thursday at 165% of book value.
"He's aware that [Berkshire's cash] is not earning a high rate of return for shareholders," said David Kass, a professor at the University of Maryland's Robert H. Smith School of Business and a Berkshire shareholder. "Paying out a special cash dividend, a one-time dividend at the discretion of management, makes some sense."
Berkshire earns revenue from holding and trading its Treasury bills, but the profit is minimal relative to its overall business operations. Berkshire's head trader, Mark Millard, declined to comment.
Other corporations with large cash holdings tend to invest in higher-yielding assets such as corporate bonds. But Berkshire prefers to hold Treasury bills because they would provide more liquidity during a market downturn, Mr. Buffett said on CNBC last month. Mr. Buffett used Berkshire's financial strength during the financial crisis to throw lifelines to companies including Goldman Sachs Group Inc. and General Electric Co. in 2008.
"I believe at some point in the future, they'll be rewarded, [and] we'll be rewarded as shareholders, for having all that cash," said Trip Miller, managing partner of Gullane Capital Partners LLC in Memphis, Tenn. "They'll be sitting there ready to pounce."
Mr. Buffett's current involvement in the Treasury market is less stressful than one in the early 1990s. Mr. Buffett stepped in as chairman of Salomon Inc. in 1991 after a rogue trader was caught trying to corner the market in two-year government debt by manipulating the auction process to buy more bonds than allowed.
Berkshire typically buys about $4 billion in Treasury bills every Monday at government auctions, or less than 4% of what the Treasury is selling, Mr. Buffett said on CNBC in January. He joked: "We're very careful about how many we bid for."
Write to Nicole Friedman at [email protected] and Daniel Kruger at [email protected]