Buffett Nears Buyback Threshold as Shares Extend Slump

Why Berkshire Is Moving Closer to Share Buyback
  • Shares approach threshold at which he would make repurchases
  • Billionaire's last buyback announcment came in December 2012

Berkshire Hathaway Inc.’s stock slump over the past year has moved shares closer to the point where Chairman Warren Buffett says they’re a steal.

Book value, a measure of assets minus liabilities, probably climbed to $154,292 per share at the end of 2015, according to an estimate from Keefe Bruyette & Woods. Class A shares changed hands for $196,260 at 11:25 a.m. in New York Wednesday, or just 27 percent higher than the estimate. The company has said it’ll buy back stock for a premium of no more than 20 percent.

Buffett, 85, largely avoided share repurchases as he built Berkshire from a struggling textile maker into a sprawling conglomerate through investments and acquisitions. The board added buybacks to his toolkit in 2011. The policy helped set a floor under the stock and provided a pathway to retire some shares held by investors seeking to exit large holdings that they’ve held for decades.

A buyback would be “terrific,” said Tom Russo, who oversees about $10 billion including Berkshire shares at Gardner Russo & Gardner. It would help “mop up shares that are in awkward hands.”

While the stock has soared during Buffett’s half-century running the company -- making the chairman and many of his early backers rich -- last year was a struggle. The shares fell 12 percent in 2015 and dropped another 0.8 percent this year.

AmEx, Wal-Mart

Three of Buffett’s big stock picks -- Wal-Mart Stores Inc., American Express Co. and International Business Machines Corp. -- lagged behind the Standard & Poor’s 500 Index last year. And operating earnings were flat through the first nine months of 2015. The company hasn’t reported fourth-quarter results.

Berkshire doesn’t pay a dividend, which puts investors under pressure to sell stock if they need income from their holdings. The last time Buffett announced a repurchase was in late 2012, when his company spent more than $1 billion on buybacks, largely from the estate of a long-time shareholder who wasn’t identified.

Still, there may be limits to how much cash Buffett is prepared to spend, even if the stock falls. S&P is reviewing whether to cut Berkshire’s credit rating amid an examination of how the company will pay for its planned purchase of aerospace-equipment maker Precision Castparts Corp. Buffett has said that he sold some stocks in 2015 partly to help pay for the $32 billion deal.

‘Massive Repurchases’

In a letter to investors last year, Buffett set the stage for much more-extensive buybacks. A decade or two in the future, he wrote, the company’s earnings will be so great that it won’t be possible to intelligently deploy all the funds back into the business.

Directors of the company will then have to decide whether to use cash for repurchases or dividends, based on their view of the firm’s intrinsic value, he wrote. Intrinsic value is a subjective measure that accounts for the amount of cash that can be taken out of a business in its lifetime. Buffett has said that book value is a decent, though understated, stand-in for the gauge.

“If Berkshire shares are selling below intrinsic business value,” Buffett wrote, “massive repurchases will almost certainly be the best choice.”