This week, Warren Buffett’s Berkshire Hathaway (BRK/A) revealed it had conducted its first buyback since 2012, repurchasing $928 million worth of stock between August 7 and August 24. This announcement followed a modification of the company’s share repurchase program policy in July, which prefaced intrinsic value over a premium cap on the repurchase price. Combined with the fact that this buyback is only Berkshire’s fourth in its history, this is a strong signal to investors that the company’s stock is one of the best investment opportunities available on the market.
The Oracle of Omaha’s has an impressive, proven track record and this recent buyback signals Buffett’s belief that Berkshire stock is currently trading below its value, and thus is an investment poised for gains. This transaction essentially suggests that investors have the opportunity to buy Berkshire’s stock at a favorable price and potentially realize the benefits of a well-executed buyback program.
Get The Full Warren Buffett Series in PDF
Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues
Q3 hedge fund letters, conference, scoops etc
Warren Buffett continues to be a supporter of buybacks, but his execution varies wildly from his peers. A typical share repurchase program is based on quantified dollar value or share count authorization. Apple, for example, authorized a $100 billion buyback in May. Other companies have authorized a specific number of shares, 50 million for example. Berkshire on the other hand, puts no such quantifier on its repurchase program, instead assessing opportunities through the lens of intrinsic value.
Since its initial buyback authorization in 2011, Berkshire’s requirement has always been valuation-based. Buybacks were restricted only to the extent that repurchases were made at no higher than a specified premium over book value and that a minimum cash balance was kept on the books. Because of these strict parameters, Berkshire’s buyback activity was limited over the years.
Berkshire has only executed limited buybacks since 2011
Source: Berkshire Hathaway
Although Berkshire has expanded its buyback flexibility since initially launching its program, it continues to maintain strict parameters relative to a vast majority of share repurchase programs. Buffett indicated that Berkshire’s transition to an operating business rather than an investment business had deteriorated the usefulness of book value as a measure of intrinsic value, and thus was the catalyst for this change. The emphasis on intrinsic value, though remains. Authorizing transactions only when Berkshire’s stock trades at a reasonable valuation has allowed Buffett to significantly outperform the market with each buyback.
At prices no higher than a 10% premium over the book value of shares
At prices no higher than a 20% premium over the book value of shares
At any time Warren Buffett and Charles Munger believe the repurchase price is below Berkshire’s intrinsic value, conservatively determined
Source: Berkshire Hathaway
This latest repurchase is the first buyback transaction since the company’s new repurchase program. The buyback …read more