This is something that Warren Buffett highlighted at Berkshire Hathaway’s recent annual meeting when he presented the highlights of the results of the company in the first quarter of 2023: “Last year at this date, we obtained the equivalent of 4 basis points (0.04%) on our cash position of nearly $125 billion; now we’re getting close to 5% on our close to $130 billion in cash.” If you do the math, that means that in nearly a year, the company’s annualized interest income has gone from about $50 million to nearly $6.5 billion. This is not peanuts!
The sharp rise in rates benefits companies in good financial health. Those with little or no debt will not be unduly affected by rising rates; those with large cash balances will see their interest income increase significantly due to the recent rise in interest rates.
Besides Berkshire Hathaway, at least two other examples come to mind among our portfolio companies: Copart and Enghouse Systems.
In the case of Copart, its balance sheet in its latest quarter, ended April 30, showed cash of just over $2.1 billion and debt of only $22.4 million, for net cash of nearly $2.1 billion. In the income statement for the quarter, the item “net interest income” (expense) went from ($4.5 million) to $17.9 million. On a per-share basis, I estimate this turnaround contributed nearly 28% of the earnings-per-share growth of 20.7% in the quarter versus a year earlier.
As for Enghouse, in its latest quarter ended January 31, 2023, the company had cash of $250.7 million with no debt. In the quarter, its interest income reached $976,000 compared to $129,000 in the same quarter last year. If the rates offered on cash remain stable, there is reason to believe that this revenue could continue to increase in the coming quarters.
For many years, companies with a lot of cash were somewhat penalized. That’s why most companies haven’t kept cash on hand and instead have gone into debt – why not take advantage of historically low interest rates?
Today, companies that have been cautious and patient over the past few years, such as Copart, Berkshire Hathaway and Enghouse, are in my view in a position of strength: they have a lot of capital. Until these companies invest this capital, they will continue to be rewarded with much more attractive interest income on their cash than in the past.
