New Leader of Giant Investment Firm Begins Spending Massive Cash Reserves
The new head of one of the world's largest investment companies is showing that he might be more willing to spend money than his famous predecessor. After taking over the top job at the start of the year, the new chief executive has already started to dip into the company's giant mountain of savings.
For a long time, the firm was known for holding onto its cash and waiting for the perfect moment to buy. Now, a shift in strategy suggests that the new leadership is finding new opportunities to put that money to work in the market.
A Shift in Spending Habits
During the spring and early summer, the company's massive pile of cash and short-term government bonds shrank. The total savings went from $380 billion down to $365 billion. While this is still an incredibly large amount of money, the drop shows that the firm is actively investing again.
Specifically, the firm spent $23.5 billion buying new stocks. At the same time, it only sold $3.7 billion worth of stocks. This means the company put nearly $20 billion of net new money into the stock market.
This is a major change because the company had spent the previous three and a half years selling more stocks than it bought. The last time the firm spent this much net cash on stocks was over two years ago.
Buying Back Shares and Boosting Profits
In addition to buying other companies' stocks, the new leader also spent $4.6 billion buying back the firm's own shares. This was the largest amount spent on share buybacks for the company in several years.
A share buyback happens when a company uses its own money to purchase its own stock from the public. This reduces the total number of shares available, which can make the remaining shares more valuable to investors. When leadership decides to do this, it usually means they believe their own company is currently a great bargain.
At the same time, the firm's overall business operations performed very well. The parent company—which owns a wide variety of businesses, including a major car insurance provider, a famous fast-food ice cream chain, and a popular toy maker—reported a 16% increase in its operating profit. Total operating earnings reached $13 billion for the three-month period. Operating income is the money a company makes from its normal, everyday business activities, before taxes and other special expenses are taken out.
Where the Profits Came From
While some parts of the business saw lower profits, other areas helped make up for the difference. Here is how different parts of the giant company performed:
- Railroad and Energy: The company's major railroad network and its energy utility business both saw higher profits.
- Manufacturing and Retail: The divisions that make products and sell them to customers also brought in more money.
- Foreign Currency Gains: The firm benefited from a $1.3 billion gain due to favorable changes in foreign currency exchange rates.
- Insurance: Profits in the car insurance division were lower, but the gains in other areas more than made up for the decline.
Acquiring New Businesses
The spending did not stop when the three-month period ended. Shortly after the quarter closed, the firm completed a massive deal to buy a large home construction company. The firm paid $8.5 billion in cash to finalize this purchase.
This active spending marks a major change in tempo. Under the previous legendary leader, the cash pile had nearly doubled over his final two years. The former boss struggled to find good businesses to buy because he felt prices in the stock market and private markets were too high. He preferred to wait patiently with a giant pile of cash rather than buy businesses that he felt were overpriced.
Staying True to a Proven Strategy
Financial experts view this sudden wave of spending as a positive sign. It suggests that the new chief executive and the legendary former boss, who still serves as the company's chairman, agree that there are good deals available in the market once again.
The new leader has promised to stick to the company's traditional, disciplined way of doing business. In his first letter to the owners of the company earlier this year, he wrote that they will only invest when the potential reward matches the risk. He also praised the company's quick-moving culture, which allows them to make big, thoughtful decisions very quickly when the right opportunity comes along.