Domino’s Pizza (NYSE: DPZ) purchase makes little dent on Berkshire Hathaway’s (NYSE: BRK.B) cash chest

Berkshire Hathaway (NYSE: BRK.B) is trapped in a bucket of cash — $325 billion to be exact. 

The conglomerate led by investment legend Warren Buffett has all that money at its disposal, but can’t find targets attractive enough to put big chunks of it to work.

As a result, Berkshire is left with purchases like the 1.3 million shares of Domino’s Pizza (NYSE: DPZ) it acquired in the third quarter. That cache was worth $549 million as of Sept. 30 and has since risen to $572 million.

There’s nothing wrong with Domino’s, the country’s largest pizza chain. “With an 85% digital sales mix, a strong loyalty program, and a quickly growing carryout business, Domino’s looks well positioned to navigate a turbulent industry environment,” Morningstar analyst Sean Dunlop wrote in a commentary.

The chain’s global market share totaled 20.5% last year, up from 18.4% five years earlier, according to Euromonitor. 

“Domino’s’ attention to operator profitability underpins some of the best store-level economics and growth prospects in the restaurant industry, despite rampant input cost inflation in recent years,” Dunlop said.

Thus it’s understandable that Buffett would think highly of the stock. He also has an affinity for junk food. So he has no trouble bucking the trend toward healthy food. Still, the purchase does seem a bit random.

Domino’s shares are tiny portion of Berkshire’s assets

But the Domino’s holding represents only 0.2% of Berkshire’s total stock portfolio ($293 billion) and a miniscule portion of its $1 trillion. So the acquisition is unlikely to move the needle for Berkshire.

Most of its stock holdings are worth more than $1 billion, and Buffett likes to go big in his purchases. But with the S&P 500 having risen 14% annualized over the past five years, there aren’t many bargains left for the picking.

“We’d love to spend it [the cash hoard], but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money,” Buffett said at Berkshire’s annual meeting in May.

“There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others,” he said in his annual letter to shareholders in February.

What to do with Berkshire’s cash

That raises the question of what Berkshire should do with its trove of cash. 

Some investors say it should begin paying a dividend, but Buffett won’t do it. He argues that Berkshire can make more money for its shareholders by investing its cash back into its businesses. 

“The test about whether to pay dividends is whether you can continue to create more than $1 of value for every dollar you retain,” Buffett said at Berkshire’s 2008 shareholders meeting.

With Berkshire bathing in so much cash, it could be argued that paying dividends passes the test. But the 94-year-old Buffett has shown no sign of changing his mind. Perhaps the company’s stance will change after he dies.

Buffett does believe in share repurchases. He buys back Berkshire shares when he considers them a bargain compared to book value. Berkshire repurchased shares every quarter from 2018 until this year’s third quarter.

But the company’s share price has jumped 51% over the last two years, putting it at 1.6 times book value, versus a five-year average of 1.4.

So more small investments like its foray into Domino’s may be coming down the pike for Berkshire.