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Buffett Expands Buyback to Pay Up to 120% of Book Value

Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) cleared the way for more share repurchases, signaling that the billionaire chairman views the stock as undervalued.

Berkshire will buy back stock for as much as 120 percent of book value, a measure of assets minus liabilities, the Omaha, Nebraska-based company said today in a statement. The old limit was 110 percent.

Buffett, 82, began a buyback program in 2011 after shunning repurchases for four decades. Opportunities to acquire shares were limited since that announcement because of the 110 percent threshold, and the company hadn’t bought back stock this year through Sept. 30 after buying less than $100 million in 2011.

“They’re, in a nutshell, getting real” after last year’s more modest authorization, said Jeff Matthews, author of “Warren Buffett’s Successor: Who It Is And Why It Matters” and a Berkshire shareholder. “It’s fine to say we’ll buy a stock at a price that no one wants to sell it at. But what’s the point?”

Book value was $111,718 a share as of Sept. 30, the company said in a statement on Nov. 2. Based on that figure, Berkshire could pay as much as about $134,062. The stock climbed 2.4 percent to $134,000 at 4:15 p.m. in New York and has advanced 17 percent this year.

Photographer: Andrew Harrer/Bloomberg

Berkshire Hathaway Inc. can buy back shares at a higher price after lifting the threshold it will pay for stock, signaling that Chief Executive Officer Warren Buffett views the shares as undervalued. Close

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Photographer: Andrew Harrer/Bloomberg

Berkshire Hathaway Inc. can buy back shares at a higher price after lifting the threshold it will pay for stock, signaling that Chief Executive Officer Warren Buffett views the shares as undervalued.

“The more generous repurchase rules should raise the shares’ floor valuation,” said Meyer Shields, an analyst at Stifel Nicolaus & Co., in a note to investors today.

When the board lifted the limit to 120 percent, Berkshire repurchased 9,200 Class A shares for $131,000 each from the estate of a long-time shareholder, who wasn’t identified in the statement. Buffett didn’t return a message left with an assistant seeking comment. The cost is $1.2 billion, or about one month of earnings. The company has a market value of about $220 billion.

‘Ample Funds’

Berkshire’s cash hoard surged 17 percent to $47.8 billion in the three months ended Sept. 30. That’s $115 million less than the record at the end of June 2011.

Buffett has been searching for larger acquisitions to use some of those funds. He passed on a deal valued at about $22 billion because he couldn’t agree on price, he said in May.

The billionaire has said he and Vice Chairman Charles Munger, 88, favor buybacks when two conditions are met.

“First, a company has ample funds to take care of the operational and liquidity needs,” Buffett wrote in his most recent annual letter to shareholders. “Second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.”

‘Mixed Emotions’

Berkshire may buy back 5,000 shares a quarter, Shields said. He raised his estimate of adjusted earnings per share to $8,521 for next year, from a prior projection of $8,439.

“We don’t expect a flood of long-term shareholders selling their shares by year-end 2012 to avoid possibly higher capital gains taxes,” he wrote.

Long-term capital gains taxes will rise Jan. 1 for top earners by 3.8 percentage-points to help fund President Barack Obama’s overhaul of U.S. health care. Obama, 51, has proposed raising the rate another 5 percentage points, to 23.8 percent.

Buffett has said he and Munger have “mixed emotions” purchasing stock from long-term shareholders at a price that he believes is below intrinsic value. Buffett calls such investors “partners.”

“We don’t enjoy cashing out partners at a discount, even though our doing so may give the selling shareholders a slightly higher price than they would receive if our bid was absent,” he wrote in the letter. “When we are buying, therefore, we want those exiting partners to be fully informed about the value of the assets they are selling.”

Berkshire shares traded at an average price of about $130,000 from the end of October through yesterday. The stock reached almost $133,000 on Nov. 27. Berkshire didn’t specify the date it bought stock from the estate.

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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