The Fed Just Gave Berkshire a Raise. Here’s How Big It Is.

Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) had about $365.5 billion in cash and short-term Treasury securities at the end of June.

To be sure, this has been investors' largest criticism of Berkshire over the past few years, and for good reason. After all, it would certainly be preferable to deploy that money in stocks or acquisitions that produce double-digit annualized returns. But it's also important to know that Berkshire's cash isn't just sitting in a warehouse. It's invested in interest-earning instruments. And it's an asset that gets more valuable as rates rise.

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The Federal Reserve just raised interest rates for the first time in three years, and a closer look shows the position of strength Berkshire Hathaway is in as we head into a rate-hike cycle amid economic uncertainty.

How much does Berkshire's cash earn?

I'll spare you the calculations from Berkshire's balance sheet, but based on the 3-month T-bill yield as of this writing (4.08%), Berkshire's $365.5 billion cash stockpile can be expected to generate about $14.9 billion of interest income on an annualized basis. Even assuming a 21% federal income tax rate, this is about $11.8 billion in after-tax income.

For context, Berkshire's operating profit is about $52 billion (annualized) based on its second quarter results. This means that Berkshire's cash could be responsible for more than one-fifth of its operating earnings.

Here's one important point. Since it is invested in short-dated T-bills and other short-term instruments, the yield from Berkshire's cash tends to track the federal funds rate. It's not a perfect correlation, but if the Fed raises rates by 0.25%, you can expect the yield from Berkshire's cash to rise by about the same percentage.

This means that a standard, quarter-point rate hike is worth about $900 million per year in additional interest income for Berkshire. It isn't immediate, as Berkshire's T-bills are rolled over as they expire, but the point is that a Fed rate hike gives Berkshire a significant raise.

Berkshire's cash is there for a reason

Let's be clear. Berkshire is holding $365.5 billion in cash to buy assets. That's the ultimate goal. If CEO Greg Abel found an extremely attractive opportunity to make a $200 billion acquisition tomorrow, he certainly wouldn't pass on the opportunity because it meant less income from Treasuries.

Having said that, Berkshire's cash stockpile is an incredible asset at the start of a rate hike cycle for two reasons. It gives the company unparalleled financial flexibility to pounce on opportunities in an uncertain economy and provides a steady stream of risk-free income while management waits for the opportunities it wants. And the income stream just got a little more valuable.

Matt Frankel, CFP® has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.