Warren Buffett Completes Buyback and Finds Berkshire Share Valuation Attractive

A little bit more than a year after he authorized repurchasing shares of his company, Berkshire Hathaway has finally bought back its own shares. Yesterday, Warren Buffett and his company announced that they were repurchasing 9200 Class A shares for the total sum of $131,000 each. They repurchased the shares from the estate of a long-time Berkshire Hathaway shareholder.

In 2011, on September 26 of that year, the board of Berkshire Hathaway authorized the repurchase of Class A and Class B shares, but only under two specific conditions… The share prices could not be higher than 10% premium of the book value per share of the company, and the repurchase was not allowed to reduce the cash holdings of the company below $20 billion.

The company told us at the time that it made the authorization announcement “in the opinion of our board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise.”

The amount of shares it repurchased would depend on the company’s cash balance, the other potential business opportunities and investments that might be more attractive, plus the input of the managers and how much they believed the shares were being discounted based on intrinsic value.

The board members are the ones that authorized the repurchase at $131,000, “coincident with raising the price limit of repurchases to 120% of book value.”

The latest reported book value of the Berkshire Hathaway Class A shares during the third quarter was $114,590 per share. The company was not capable of repurchasing the shares at that price in line with the former authorization, because a 10% premium would only come to the amount of $126,049. At the 120% maximum, this allowed any share repurchases to go all way up to the price of $137,508.

There may be more share repurchases to follow, although Berkshire Hathaway hasn’t mentioned any specific plans. As well, there isn’t any type of time limit or restriction on the authorization.

“Berkshire may purchase additional shares in the market or through direct offerings at no more than 120% of book value,” it said.

More share repurchases may follow, though t­­­he company expressed no specific plans. There is currently no time limit on the authorization.

Throughout the last five years, shares of Berkshire Hathaway have declined around 9%. During the same time period, the company’s revenue per share increased annually at a rate of 5.2%, the book value increased at 8.1% and the free cash flow rose to 19.3%. There is currently about $82.4 billion in cash on the company balance sheet, and this is up from the 68.6 billion that they had on the balance sheet just one year ago. The company does not have any debt.

Berkshire Hathaway’s P/E is 16.3, the P/B is 1.2 and the P/S is 1.4.

Buffett has often previously mentioned that CEOs should repurchase their shares only when they fall below intrinsic value. If you base this move on his former comments laid out in a shareholder letter, this current buyback shows us that Warren Buffett believes his shares are currently trading at a discount. Here is an excerpt of the letter for you to read:

Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another.

Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)

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