Warren Buffett has always believed in the power of share buybacks, but only at the right price. Over the weekend, Buffett’s Berkshire Hathaway (ticker: BRK.A, BRK.B) revealed that, for the first time in about six years, Buffett spent nearly $1 billion scooping up shares of Berkshire stock.
Berkshire reported $928 million in share buybacks in the third quarter, its first share repurchase since 2012. While the buybacks marked a change in strategy for Buffett and Berkshire, they weren’t necessarily a surprise given the company recently changed its a long-held criteria for buybacks.
Berkshire previously was restricted from buying back its stock if its share price was at or above a 20 percent premium to book value per share. However, in July, Berkshire amended its policy to allow buybacks any time Buffett and vice chairman Charlie Munger “believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.”
While the $928 million buyback is notable as a change of strategy for Buffett, it’s still a relatively modest investment considering Berkshire’s roughly $100 billion cash balance and its third-quarter operating profit of $6.9 billion, up more than 100 percent from a year ago.
Buffett has often discussed his attitude on buybacks.
“When stock can be bought below a business’s value, it is probably the best use of cash,” he said in 2004.
In August, Buffett said Berkshire is still being very selective with its approach to buybacks. “We need a big enough discount, so we’re buying it at what we know is a price where the continuing shareholders are going to be better off,” he said then.
Buffett has been under pressure to find ways to put Berkshire’s large cash position to use. In the past month, Berkshire has invested $600 million in emerging market digital payments companies Paytm and StoneCo, but Buffett hasn’t made a huge acquisition since buying Precision Castparts for $32.3 billion in 2015.
Morningstar analyst Greggory Warren says an extremely limited buyback strategy doesn’t do much to solve Berkshire’s cash problem.
“With less than $1 billion spent on buybacks during the period, it had little impact on cash balances or the firm’s share count,” Warren says.
“We think the company is still capable of increasing book value per share at a high-single- to low-double-digit rate annually.”
Morningstar has…
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