Rising Interest Rates & Big Piles of Cash
Rising Interest Rates & Big Piles of Cash
Happy Monday and welcome to our new subscribers!
Gordon Gekko might believe that greed is good, but I’m with Paul Samuelson: Boring is good.
“Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.”
Rising Interest Rates & Big Piles of Cash
Nothing too surprising out of the Federal Reserve last week: In an attempt to bring our not-so-transitory inflation to heel, Jerome Powell and co. raised interest rates by 0.25% and telegraphed six more hikes still to come in 2022.
This topic has been analyzed to death over the past few months, especially its potential impact on the stock market. So I’ll spare everyone the pointless speculation and rehashed talking points.
On matters like this, I defer to the great Seth Klarman:
“Macro worries are like sports talk radio. Everyone has a good opinion, which probably means that none of them are good.”
(H/t to Alan Soclof, who writes the Just Raised newsletter, for unearthing this quote.)
I don’t pretend to know how all of this will play out. No one does.
But one under-discussed aspect of rising interest rates deserves special attention. As I’ve touched on before, holding lots of cash on hand has become all the rage among large-cap tech titans and the like.
But, with rates near zero for much of the past decade, the Berkshire Hathaways and Alphabets of the world have earned next to nothing on these imposing cash hoards.
That’s about to change.
If interest rates reach 2% by the end of 2022 (and the St. Louis Fed prez is actually pushing for 3%) these companies are gonna cash in:
Berkshire Hathaway ($144 billion cash) — $2.88 billion in annual interest
Alphabet ($140 billion cash) — $2.8 billion in annual interest
Microsoft ($125 billion cash) — $2.5 billion in annual interest
Amazon ($96 billion cash) — $1.92 billion in annual interest
Apple ($64 billion cash) — $1.28 billion in annual interest
Not a bad way to earn a few extra (billion) bucks.
Buffett & Berkshire
Berkshire Hathaway continued its torrid start to 2022 with another strong week. So strong, in fact, that the company’s A shares topped $500,000 for the first time. Berkshire is up almost 13% year to date, far outpacing the S&P 500 (-7%) and the Nasdaq (-12.25%).
So much for Buffett being past his prime.
Plus, Berkshire added another 18.1 million shares of Occidental Petroleum, bringing its stake in the Texas-based oil giant to nearly 15%.
Although Occidental doesn’t seem obviously underpriced, its future looks bright for several reasons:
(1) Skyrocketing oil prices. Duh.
(2) When oil prices go up, so does free cash flow. In the next few years, Oxy should have no trouble paying down debt and returning profits to shareholders.
(3) Oxy owns 2.9 million net acres in the Permian Basin. Drilling in the Permian is among the cheapest options for domestic oil producers, putting the company in excellent position to thrive regardless of where oil prices go from here.
(4) Looking ahead, Oxy is positioning itself well for the future. The company opened the world’s first large-scale carbon capture plant that promises to remove carbon dioxide from the atmosphere and store it deep underground.
The Beauty of Dividend Growth Investing
Check out the yield on cost of these Berkshire Hathaway investments:
🥤 Coca-Cola — 54.2%
💰 Moody’s — 27.9%
💳 American Express — 24.5%
🏦 Bank of America — 5.9%
And let’s not forget the new kid on Berkshire’s block:
📱 Apple — 2.5%
Already higher than the S&P 500 average dividend yield.
Behold the power of long-term dividend growth.
Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.