Warren Buffett’s First Berkshire Hathaway Share Buyback in 40 Years
Another endorsement for the group and the bull case is that billionaire Warren Buffett has been buying these stocks aggressively.
— Elliott Gue, Personal Finance
For the first time in more than 40 years (p. 24), Warren Buffett has authorized Berkshire Hathaway to repurchase its own shares. Investors loved the news, and Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) has jumped more than 10 percent since the announcement on Monday (Sep. 26th). Buffett stated in his 1999 shareholder letter (p. 17) that Berkshire would only buy back shares if the stock was significantly undervalued and would never do it just to stem a stock slide and to support the stock price:
We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Please be clear about one point: We will never make purchases with the intention of stemming a decline in Berkshire’s price. Nor will we attempt to talk the stock up or down. Rather we will make share purchases only if and when we believe that they represent an attractive use of the Company’s money.
You should be aware that, at certain times in the past, I have erred in not making repurchases. My appraisal of Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds. We have therefore missed some opportunities.
How to Calculate Berkshire Hathaway’s Book Value Per Share
In Monday’s announcement, Buffett said that stock repurchases will be made at prices no higher than a 10% premium to the estimated book value per share at time of purchase and only to the point where Berkshire’s cash balance is at least $20 billion. As of June 30th (the last reported period), Berkshire’s book value was $67.42 per Class B share. I get this number by doing the following:
- Take the $163.007 billion shareholder equity number on page 2 of the June 30th 10-K and divide it by the 1,649,052 shares outstanding number on page 3. The resulting calculation of $98,849 is the book value per share of the Class A shares.
- Take the $98,849 book value per Class A share and divide it by 1,500, which is the exchange ratio between Berkshire’s Class A and Class B shares. The resulting number is $65.90.
The book value has almost certainly increased since June 30th, but if it were the same it would mean that Buffett is willing to buy the Class B shares up to a price of $72.49 (1.1 * $65.90). Berkshire’s cash balance was $47.891 billion on June 30th (page 4).The $9 billion Lubrizol acquisition closed on September 16th, so subtracting $9 billion from $47.891 yields $38.891 billion in cash and $18.891 billion available ($38.891 billion minus $20.0 billion minimum balance) for stock repurchases.
Stock Buybacks vs. Dividends
Why did Buffett choose stock buybacks vs. dividends? A regular dividend is a long-term commitment to periodically pay out cash to shareholders. In contrast, a share buyback authorization does not commit to any amount of cash outflow, periodic or otherwise. While the authorization is for an “indefinite” period of time, the company is not required to buy back a single share of stock.
Buffett wants the flexibility to use excess cash for outstanding investments he may uncover over time and not be cash-strapped by a dividend obligation. If Berkshire stock is an outstanding investment, he’ll pull the trigger; if it’s not, he’ll find something else. Buffett has always believed that he is better capable of finding high-return investments than the average shareholder and his track record says he’s absolutely right to think that.
Another benefit of a stock buyback is that is much more tax efficient. The stock appreciation from a stock buyback is unrealized capital gains and tax-free until the stock is actually sold. In contrast, a qualified cash dividend would be immediately taxable at 15%, with dividend tax rates scheduled to go up to ordinary income tax rates (28% to 39.6%) in 2013.
Is Berkshire Hathaway Class B Worth $112 Per Share?
For the foreseeable future, I think this repurchase news will put a floor under the Class B shares at around $71-$72. On the other hand, the sky’s the limit on the upside. According to a recent stock analysis by fund manager Whitney Tilson, fair value for the Class A shares is $169,405. Divide this number by 1,500 to get the Class B valuation, and the value you get is $112 per share.
Wow. As Elliott Gue of the market-beating Personal Finance investment service has written: “Who wants to bet against Buffett?”