Can Berkshire Hathaway Ride Out a Recession?

Berkshire Hathaway had enough excess capital at a time when financing was drying up everywhere. Here's our take on how this stock can potentially make it through a recession.

• A proven track record of generating cash in both good times and bad times
• A healthy balance sheet
• A series of investments and subsidiaries

Berkshire Hathaway (NYSE: BRK-A) / (NYSE: BRK-B) is perhaps best known as the company that Warren Buffett has led since 1965. Yet how he has led it is at least as important as the fact that he has led it. In his time at the helm, he has transformed the business from a struggling textile manufacturer into one of the absolutely strongest, fortress-like companies on the planet.

That transformation makes Berkshire Hathaway a great stock to ride out a recession with, as it has a history of not only surviving tough economic times but also emerging stronger on the other side. If you’re worried about further rockiness ahead in the market and economy, Berkshire Hathaway is certainly worth a closer look.

A history of rescuing firms in tough times

For an example of just how strong Berkshire Hathaway is, during the global financial crisis that started in 2007, when many other companies were failing, Berkshire Hathaway actually bailed several of them out. Those companies rescued by Berkshire Hathaway include giants like Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC). 

Think about that for a moment. At a time when financing was drying up virtually everywhere, Berkshire Hathaway had enough excess capital available to it to not only cover its own operations but also offer cash to other companies. Of course, Berkshire Hathaway ultimately profited handsomely from its bailout investments. Still, the fact that it was able to make those investments at a time when virtually nobody else could get their hands on cash speaks to the fundamental strength the company has.

Where does that strength come from?

Key to Berkshire Hathaway’s success on that front is a combination of a very strong balance sheet and a collection of operational and insurance companies designed around generating cash. Indeed, if there’s one common complaint levied about the company, it’s that it often finds itself in the position of having too much cash on hand, thanks to all the money its operating businesses earn.

Having too much cash can seem like a “problem” in the sense that cash itself tends to earn a lousy return — basically, the interest rates that banks pay. In addition, in inflationary periods, cash loses its purchasing power, which then drives something of an imperative to either attempt to invest it productively or pay it out as a dividend. Still, when times get tough, there’s no such thing as having too much cash, especially if that cash lets you be the one bailing other businesses out.

It helps that Berkshire Hathaway’s primary business line is insurance.  That’s the business of pricing risk, which means it has a fabulous idea of just how much risk it is exposed to, both from an absolute level and from a probabilistic one. That lets it know how much it needs to charge for its services and how much it needs to keep in cash, Treasuries, or other low-risk investments of its own to cover those risks. 

Any cash it generates above that simply delivers more opportunities for Berkshire Hathaway to invest aggressively, particularly in times of higher fear and uncertainty in the market. It has used that cash to buy entire companies — such as BNSF Railroad and Dairy Queen. On top of both those subsidiaries and its aforementioned bailouts, it has also used that cash to make major investments in publicly traded companies like Apple (NASDAQ: AAPL) and Chevron (NYSE: CVX). 

In addition to the new cash Berkshire Hathaway keeps generating and eventually investing, it has an incredibly solid overall balance sheet. It has a debt-to-equity ratio below 0.3 and a current ratio above 1.4.  The low debt to equity ratio makes it very unlikely that it will run into a financing problem of its own. Likewise, the high current ratio means it has the ability to pay the bills coming due within the next year, even if its revenue were to get temporarily disrupted.

Put it all together to get a business that’s worth considering during tough times

When you add it all together, you get a company that has:

• A proven track record of generating cash in both good times and bad times,
• A healthy balance sheet is appropriate for the insurance industry it’s a part of, and
•  A series of investments and subsidiaries that are also strong, major businesses on their own.

That combination adds up to a business that looks capable of making it through a recession and coming out the other side in a pretty strong position. If you’re worried about staying invested during what could be a rough time in the global economy, then Berkshire Hathaway is certainly worth a closer look. 

At the time of publication, Chuck Saletta owned Bank of America bonds scheduled to mature in July 2024.

Sources – EasyResearch, TheWeek, Insurance Business Mag, Bloomgberg, Britannica, Investopedia