Berkshire Hathaway Board of Directors Approves Share Repurchase Plan

I’ve made no secret of the fact I’ve been a net purchaser of Berkshire Hathaway shares for the past year.  The valuation seemed (and still seems) absurdly low relative to intrinsic value.  Apparently, the Berkshire Hathaway Board of Directors and management agrees.¹  The company is now looking at itself as the best use of the firm’s cash.

To the point, a few days ago, The Board of Directors of Berkshire Hathaway announced that the company may repurchase its own stock at any time the share price is at or below 110% of book value (a 10% premium to book value).

The share repurchase plan is only allowed to be executed when Berkshire Hathaway’s cash levels are at or above $20 billion, due to the company’s policy of having a lot of excess liquidity hanging around, many times in the form of highly-liquid short-term U.S. Treasury bills.  Given that the company is now hanging on to nearly $50 billion in cash and the profits that roll into headquarters in normal times now exceeds $1 billion per month, or $12 billion per year, that should be a relatively easy hurdle to meet.

The Effect of the Berkshire Hathaway Stock Buyback on Long-Term Shareholders

As a long-term shareholder, I’m fine with the stock buyback because it’s no different than if I were in business with someone and decided to buy out part of their stake.  In essence, the company’s profits are being used to buy out other partners so that the remaining investors own a bigger chunk of the pie.  As long as the price paid for the repurchased stock is reasonable relative to intrinsic value, the remaining shareholders should make out just fine.

However, I am more than slightly irritated I didn’t get a chance to buy as many shares as I would have liked in the $65 to $70 range.  Mind you, I still think the stock is cheap on an intrinsic value basis, but it’s not as cheap as it was a few days ago.  With the $9 billion Lubrizol acquisition closing and being added to the portfolio of operating businesses Berkshire Hathaway owns, on top of the acquisition of Burlington Northern Santa Fe, I was thrilled to see the stock price falling.  The share repurchase plan announcement, it would seem, has thwarted that decline.  The stock is up between 8% and 10% in the past few days.

The last time I recall Berkshire Hathaway discussing any sort of stock repurchase activity was when I was a teenager.  During the dot-com bubble, Berkshire Hathaway had fallen significantly and Warren Buffett announced that the company might repurchase its own stock.  It didn’t end up doing so, and even now, still hasn’t committed to any repurchases.  The announcement is simply that the Board of Directors has given Buffett the authorization to complete a buy back at his discretion under the program guidelines.

What would make me very happy is for the price to stay exactly where it is, or lower, for the next year so I can buy as much ownership in the company as I can responsibly afford given the other projects in my life.  I’d love to get through another few seasonal profit cycles and get shares not only for my own, personal accounts, as well as the accounts of our businesses.  This includes the KRIP portfolio, which is the only portfolio under my purview I actually discuss given that it is relatively small and normally trades primarily in high-quality blue chip stocks.  It’s been awhile, but I sometimes mention what’s going on in the KRIP from time to time.  Lately, it’s been mostly entirely acquisition of shares of Berkshire Hathaway and I expect it will continue to be for the foreseeable future.  That is unless I can get Brown-Forman at the price I want.

^{1.) Ordinarily, I shy away from discussing individual securities, including individual stocks, unless they are widely held, mega-capitalization blue chips that can serve as a useful example of whatever topic we are discussing and the average reader, statistically, already owns them through an S&P 500 index fund.  With Berkshire Hathaway now sitting firmly in the S&P 500 and ranking as one of the largest companies in history, it now falls under that category.}