(BRK.A), (BRK.B)
Warren Buffett may be frustrated that he can’t find any “elephants” to acquire, but he did give hope to Berkshire investors that there is one elephant-sized company that he would love to own more of, Berkshire Hathaway.
In his just released Annual Letter to Shareholders, Buffett stated “it is likely that – over time – Berkshire will be a significant repurchaser of its shares…”
While Buffett made no mention of paying a dividend, which is something he has been negative on in the past, he is clearly willing to put more of Berkshire’s $112 billion in cash into stock buybacks if the price is right.
It’s a process that’s already begun.
In the 3rd quarter of 2018, Berkshire bought back $928 million of its stock, which brought the 2018 total to more than $1.3 billion.
Now, with no big acquisition moves on the horizon, Buffett seems to be warming even more to the idea.
Remember, he stated that in future buybacks Berkshire would be a “significant repurchaser.”
Does this indicate that future buybacks could be substantially larger than what we saw last year?
It all comes down to price, and whether in Buffett’s opinion Berkshire is trading below its intrinsic value.
“If the market prices a departing partner’s interest at, say, 90¢ on the dollar, continuing shareholders reap an increase in per-share intrinsic value with every repurchase by the company,” Buffett explained.
“Assuming that we buy at a discount to Berkshire’s intrinsic value – which certainly will be our intention – repurchases will benefit both those shareholders leaving the company and those who stay,” Buffett said.
Ever cautious, Buffett is only interested in buybacks if they create value for shareholders, noting that “Blindly buying an overpriced stock is value destructive, a fact lost on many promotional or ever-optimistic CEOs.”
In his letter, Buffett also highlighted how over the years stock repurchases of some of the minority stakes Berkshire holds have given it an increasing share of those companies without spending a dime.
He pointed out that “Berkshire’s holdings of American Express have remained unchanged over the past eight years. Meanwhile, our ownership increased from 12.6% to 17.9% because of repurchases made by the company. Last year, Berkshire’s portion of the $6.9 billion earned by American Express was $1.2 billion, about 96% of the $1.3 billion we paid for our stake in the company. When earnings increase and shares outstanding decrease, owners – over time – usually do well.”
And over time, as Berkshire increases its own buybacks, hopefully shareholders will do well too.
© 2019 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.