Berkshire Stock Buyback: What Investors Need to Know

Berkshire Hathaway, the conglomerate led by Warren Buffett, has been a prolific buyer of its own stock over the years.

In 2011, Berkshire repurchased $1.3 billion of its own shares, accounting for nearly 10% of its outstanding stock.

Buying back stock can be a savvy move for investors, as it can increase earnings per share and boost the stock's value.

Berkshire has a history of using its cash reserves to repurchase stock, with a focus on buying back shares when they're undervalued.

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Berkshire's Buyback Program is a significant aspect of the company's strategy. Berkshire Hathaway's buyback program was modified in 2018 to allow for buybacks as long as two conditions are met: the company's cash and equivalents remain above a $30 billion cushion, and both Warren Buffett and Vice Chairman Charlie Munger agree that the current stock price is below a conservative estimate of the company's intrinsic value.

The first condition isn't an issue, as Berkshire's cash and equivalents have exceeded $157 billion. The second condition is subject to interpretation, but it's clear that if there are buybacks happening, it means Buffett and Munger believe the stock is trading at a discount.

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In fact, Berkshire repurchased $665 million in September alone, at an average price of about $366 per share. This is a significant amount, especially considering the company's huge stockpile of cash.

Here's a breakdown of the two conditions that must be met for Berkshire's buybacks:

Berkshire Hathaway's buyback program has been a significant investment strategy in recent years. Berkshire has spent tens of billions of dollars buying back its own stock over the past few years.

The company's buyback pace has slowed down in the third quarter of 2023, with Berkshire spending $1.1 billion on buybacks. This is a decrease from the $4.4 billion spent in the first quarter and $1.4 billion in the second quarter.

Berkshire's buyback spending has been higher than any other investment since 2018, when the current version of its buyback plan started.

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Berkshire's Program was modified in 2018 to allow for buybacks under two conditions. The first condition is that the company's cash and equivalents must exceed a $30 billion cushion, which hasn't been an issue for Berkshire in recent years.

Berkshire's cash and equivalents exceeded $157 billion at the end of the third quarter, the highest level ever. This means the company has more than enough cash to support its buyback program.

The second condition is that both Warren Buffett and Vice Chairman Charlie Munger must agree that the current stock price is below a conservative estimate of the company's intrinsic value. This is a subjective condition, and it's not known how Buffett and Munger calculate the intrinsic value of Berkshire.

The pace of buybacks was generally slower in the third quarter, but it's worth noting that buybacks took place in all three months of the quarter. In September, Berkshire repurchased $665 million out of the $1.1 billion quarterly total, and at an average (Class B equivalent) price of about $366 per share.

Here's a breakdown of the two conditions for Berkshire's buyback program:

Berkshire's massive cash pile is a drag on performance, with over $122 billion in cash and cash equivalents plus short-term investments at the end of 2Q 2019.

Historic low interest rates are making it difficult for Berkshire to generate market-beating returns, which is why returning capital to shareholders and shrinking its equity base makes sense.

Berkshire spent only $1.4 billion on buybacks in the second half of 2018, followed by $1.6 billion in 1Q 2019, which is a relatively small amount compared to its market capitalization of about $500 billion.

Raising buybacks to $10 billion per quarter would decrease the equity base by about 2% per quarter, which could boost the share price noticeably.

In comparison, Bank of America and Wells Fargo repurchased between 7% and 8% of their shares in the past year, while property insurers Chubb and Travelers bought back between 2% and 4% of their shares.

Berkshire's market price is significantly below the sum of its parts, according to Jay Gelb of Barclay's, which means that buying back shares could be a good way to boost the stock price.

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Berkshire's cash pile is a serious drag on performance due to historic low interest rates. The company had over $122 billion in cash and cash equivalents plus short-term investments at the end of 2Q 2019.

Buffett admitted that size is a drag on performance, which is why returning capital to shareholders and shrinking the equity base makes sense. However, Berkshire spent only $1.4 billion on buybacks in the second half of 2018, followed by $1.6 billion in 1Q 2019.

Raising buybacks to $10 billion per quarter would decrease the equity base by about 2% per quarter, which may be enough to boost the share price noticeably. This is in contrast to Bank of America Corp. and Wells Fargo & Co., which repurchased between 7% and 8% of their shares in the past year.

Berkshire's market price is significantly below the sum of its parts, according to Jay Gelb of Barclay's. This is due to accounting rules that require Berkshire's operating companies to be included in book value at an amount far below their current value.

Berkshire does not appear to have a formula-driven plan to repurchase shares when it is in possession of material non-public information.

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Warren Buffett announced a plan to repurchase Berkshire Hathaway's stock for the first time since taking over the firm in 1965.

Berkshire's Class A stock surged 8.1 percent, or $8,129, to close at $108,449, while its less expensive Class B shares rose $5.72, or 5.7 percent, to $72.09.

Buffett wants Berkshire stock to trade at a fair price, and this move signals that he didn't agree with the recent prices.

The company won't repurchase stock if doing so would reduce its cash on hand below $20 billion, but Berkshire had nearly $48 billion cash on hand at the end of June.

Only two other companies have an open-ended buyback program like this: Berkshire Hathaway and Exxon Mobil Corp., which announced its repurchase plan in 2000.

Warren Buffett announced a plan to repurchase Berkshire Hathaway's stock for the first time since taking over the firm in 1965.

Berkshire's Class A stock surged 8.1 percent to close at $108,449, while its less expensive Class B shares rose 5.7 percent to $72.09.

Buffett wants Berkshire stock to trade at a fair price, and this move signals that he didn't agree with the recent prices.

Berkshire's book value is a measure of its value, similar to the intrinsic value figure Buffett calculates to determine if an investment is overpriced.

At the end of June, Berkshire estimated its assets were worth $98,716 per Class A share after liabilities were deducted.

Berkshire's cash on hand at the end of June was nearly $48 billion, which means it won't repurchase stock if doing so would reduce its cash below $20 billion.

The only other company with an open-ended buyback program like this is Exxon Mobil Corp., which announced its repurchase plan in 2000.

Berkshire Hathaway has bought back tens of billions of dollars of stock over the past few years, spending more on buying back its own stock than on any other investment since 2018.

Berkshire's third-quarter buybacks were significantly lower than other recent quarters, with a pace of $1.1 billion.

Berkshire Hathaway has eliminated a restriction that capped its ability to buy back its own stock, allowing Warren Buffett to deploy more of the conglomerate's $108 billion of cash and equivalents.

This move is a significant shift in Berkshire's capital allocation strategy, which was previously restricted to buying back shares at a price not exceeding 1.2 times book value, or a 20 percent premium. Now, stock buybacks can be made any time that Buffett and Berkshire Vice Chairman Charlie Munger believe the repurchase price is below Berkshire's intrinsic value.

The company's Class A shares closed at $288,500 Tuesday, roughly 1.37 times their $211,184 book value per share as of March 31. Berkshire's prior program provided a more conservative approach to buying back shares.

Berkshire will not initiate any share repurchases under the amended program until it publicly releases its second-quarter results, which are scheduled after the market close on Aug. 3. This is a deliberate move to allow for transparency and accountability in the company's financial decisions.

Warren Buffett has been vocal about his desire to make large acquisitions to boost Berkshire's earnings power and make better use of low-yielding cash. He has stated that high market prices have kept him from making big deals, but the new buyback policy may provide an alternative way to deploy the company's cash hoard.

Berkshire is unlikely to become a more active repurchaser of its shares in the near term.

Buffett continues to hope for an elephant-sized acquisition, which he would fund with cash, as stated in his annual letter.

A significant portion of Berkshire's cash stash is untouchable, with at least $20 billion reserved to guard against external calamities, as Buffett has pledged.

Berkshire stock is relatively illiquid, with a daily trading volume of around $1 billion, which is relatively low compared to other large-cap stocks like Facebook.

This low trading volume makes a more aggressive buyback program likely to move the price significantly, quickly raising its cost, per Barron's.

Making a tender offer for a large block of stock at a price above the market price but below Buffett's estimate of its intrinsic value is possible, but Barron's gives this very low odds of happening.

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