As of the end of 2017, Berkshire Hathaway had $115.95 billion in cash and short-term investments. The
firm had to decide on what to do with the large amount of cash. They could either pay dividends, have
share repurchase, or reinvest.
One of the reasons why the firm should not have that much of cash on hand is because bank interest
rate cannot beat the inflation rate, therefore the cash should be mobilized into investment creating
returns larger than the inflation rate.
If they choose to pay dividends, the firm could either pay all out, or pay part of the cash then reinvest
the remaining cash. Dividends implied the promise of future dividends payout, otherwise, investors
would assume the firm be in a bad financial position. In terms of reinvestment, the firm could choose to
reinvest in the current business or have acquisitions, however, the M&A deals that Berkshire was having
an eye on were not very potential. Besides, share repurchase was not favorable since share market
value reached near 170% of its book value, passing the firm’s target of 120% of the book value.
On the investors’ point of view, dividends payout could satisfy their demand for current income, but it
was subjected to higher tax rate than capital appreciation. Since Berkshire had done well in the
operations of its business, Modigliani theory holds that investors could reinvest in the company if there
was dividend payout, which might be irrelevant in this case. According to the statement of cash flows,
investing activities in the past years incurred more and more losses. This indicates that reinvestment
might not be the optimal way to use the cash at the moment. On the other hand, share repurchase
could be useful to mobilize the cash reserves. The firm could buy back class-A shares and enhance its
ownership which allowed more autonomy on Berkshire’s operations since shares of institutional
investors were equivalent to that of the firm.