There is something I notice in the recent results of a few of our portfolio companies: the interest income of companies with a lot of cash has literally exploded.
It’s something Warren Buffett highlighted at the recent Berkshire Hathaway (BRK.B, US$330.62) annual meeting when he presented highlights of the company’s first quarter results. 2023: “Last year at the same date, we obtained the equivalent of 4 basis points (0.04%) on our cash position of nearly 125 billion US dollars (B$) ; 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 $50M to nearly $6.5B. These are 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.
In addition to Berkshire Hathaway, at least two other examples come to mind among our portfolio companies: Copart (CPRT, US$88.33) and Enghouse Systems (ENGH, $37.24).
In the case of Copart, in its most recent quarter ended April 30, its balance sheet showed cash of just over $2.1 billion and debt of only $22.4 million, for net cash of nearly 2 .1B$. However, in the statement of results for the quarter, the item “net interest income” (expense) went from ($4.5M) to $17.9M. I estimate that this turnaround contributed almost 28% to the earnings per share growth (of 20.7%) recorded in the quarter compared to the same period a year earlier.
As for Enghouse, in its most recent quarter ended January 31, 2023, the company had cash on hand of $250.7 million and had 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 these revenues could continue to increase in the coming quarters.
For the past many years, companies with a lot of cash were somewhat penalized. That’s why most companies haven’t kept such 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 cash interest income than in the past.