Buffett Gets Bullish on Berkshire

It's a common irony that most share repurchases come at the worst possible time. Buybacks peak when shares are expensive and dry up when they're cheap. What's meant as a way to create shareholder wealth habitually destroys it.

Berkshire Hathaway (NYSE: BRK-B  ) is a different story. Warren Buffett's company hasn't repurchased a dollar of stock over the years until now, when shares are effectively the cheapest they've ever been.

This morning, Berkshire's board of directors authorized a share-repurchase program of an unspecified amount, so long as the buybacks don't bring the company's cash hoard below $20 billion.

Why is simple. "In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than" the current price, the company said in a statement.

That wasn't the first time Berkshire management has pounded the hammer on valuation. In July, Vice Chairman Charlie Munger said that Berkshire's share price "is at a point Buffett and I never anticipated it would go to." Shares went on to fall another 15% after he made that comment.

Buffett himself has laid out ground rules for share repurchases. In Berkshire's 1999 annual report, he wrote that, "We will never make purchases with the intention of stemming a decline in Berkshire's price. Rather we will make them if and when we believe that they represent an attractive use of the Company's money." He went on: "We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated."

Asked about share repurchases in 2009, Buffett said they would only come when Berkshire's stock traded "demonstrably lower than intrinsic value." Apparently, it now is.

Just how cheap is the stock? I've argued that the best way to value Berkshire is the price-to-book ratio. Here, shares are about the cheapest they've been in at least two decades:

Source: Capital IQ, a division of Standard & Poor's.

Before this morning's 6% pop, Berkshire shares traded at 1.02 times book value, or about 50% below their historic average. Demonstrably cheap, you might say.

There's a broader point here regarding whether these repurchases say something about Buffett's investment outlook. Does repurchasing stock mean he's run out of other ideas for the company's cash? That's doubtful, I'd say. In the past quarter alone, Berkshire spent around $15 billion on acquisitions and investments, most recently the $5 billion injection into Bank of America (NYSE: BAC  ) at gracious terms, and a 10 million-share purchase of longtime favorite Wells Fargo (NYSE: WFC  ) . As stocks crashed in early August, Buffett minced no words: "[Aug. 8], we spent more money in the stock market buying than any day this year." Berkshire has hardly shown a blip of slowdown in its ability to put cash to work.

Repurchases do, however, allow Buffett to put a massive amount of money to good use in a single investment. Unless shares rally substantially from here, it's not unreasonable to think Berkshire could repurchase more than $10 billion worth of stock. If it does, it'd be one of the largest single investments the company has made over the past decade.

And who might it buy these shares from? Berkshire says it can repurchase stock from either the open market or through private transactions. Those private transactions could get interesting because one very, very large Berkshire investor is in the process of liquidating his holdings: Buffett. When Buffett announced several years ago that he will donate the bulk of his fortune to the Bill & Melinda Gates Foundation, shareholders fretted that his selling might depress Berkshire's share price. A private transaction could bypass that mess, allowing Berkshire to purchase billions of dollars worth of shares directly from the Gates Foundation, both fulfilling its buyback plans and relieving any pressure that liquidating Buffett's shares may be having on Berkshire's stock. 

What's better than the world's best investor turning bullish on his own company and putting money where his mouth is? Hard to imagine. For Berkshire shareholders, this might be about as good as it gets.

Fool contributor Morgan Housel owns shares of Berkshire and B of A preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Bank of America and Berkshire Hathaway. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (56)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2011, at 4:30 PM, stan8331 wrote:

    I've seen several comments from Buffet in recent months indicating he sees Berkshire as being extremely cheap. Given the track record of the man speaking and the fact that the stock is barely sitting at book value, I think it would be very unwise to disagree. It is a stark contrast with most share repurchases, where we see company after company throwing away cash trying to turbocharge momentum on already overheated stocks.

  • Report this Comment On September 26, 2011, at 4:40 PM, DJDynamicNC wrote:

    Can't argue with this analysis - good work.

  • Report this Comment On September 26, 2011, at 4:58 PM, naughtyguy wrote:

    The shares are the cheapest they have ever been? Look at a 3, 5, or 10 year chart and then write an apology!

    They could have more wisely paid down the debt, and bought at a lower price. The announcement moves the stock up, but they have no obligation to actually buy more shares. No doubt they will be able to buy if the shares keep falling and they need some support. I hate reading mis-information!

  • Report this Comment On September 26, 2011, at 5:10 PM, naughtyguy wrote:

    I reacted before reading. You meant that the shares are the lowest related to book value. I don't know what the book value was at the lower points of the stock, so I can't prove you right or wrong. Buffett has stated they wouldn't buy stock to slow a decline, but wwould if they thought the price was a great value. Hmmm. Who knows!

    I still believe paying down debt would have been a better investment as money might be getting tighter with the world economy in such rotten shape!

  • Report this Comment On September 26, 2011, at 5:10 PM, TMFHousel wrote:

    <<The shares are the cheapest they have ever been? Look at a 3, 5, or 10 year chart and then write an apology>>

    There's a difference between share price and share value. Shares aren't the lowest they've been in decades, but they are the cheapest measured against book value, as the article clearly states. No apology needed.

  • Report this Comment On September 26, 2011, at 5:14 PM, TMFHousel wrote:

    <<I don't know what the book value was at the lower points of the stock, so I can't prove you right or wrong>>

    See chart in article.

  • Report this Comment On September 26, 2011, at 5:14 PM, TMFHousel wrote:

    <<I still believe paying down debt would have been a better investment as money might be getting tighter with the world economy in such rotten shape!>>

    Worth noting that a lot of that debt has an interest rate near 0%.

  • Report this Comment On September 26, 2011, at 6:09 PM, whyaduck1128 wrote:

    If I've been reading it correctly, for years the Great God Buffett has preached against share buybacks--"We will never make purchases with the intention of stemming a decline in Berkshire's price".

    Now, because he wants the company to do it, they're good. It has nothing to do with the decline in the company's price, oh no. Of course not. Never. The sweet smell of hypocrisy that I detect here is a figment of my imagination.

  • Report this Comment On September 26, 2011, at 6:22 PM, jdp245 wrote:

    Buffett has been vocal against repurchases at other times. So when I heard this, my first thought was to wonder if Buffet had concerns about inflation and wanted to reduce the risk held in Berkshire's cash position. But as a shareholder, I have no problem with the company repurchasing shares when the stock is undervalued.

  • Report this Comment On September 26, 2011, at 6:22 PM, Phillipcroy wrote:

    To whyaduck1128 - The idea is not to stem a decline in the stock price. Like any other investment Buffet has made over the last 50+ years, Buffet buys when a stock is trading lower than its intrinsic value. Buffet, unlike so many other leaders of industry, has stuck to his guns through thick and thin and an analysis of the company book value shows his statements to be true. The guy is GIVING away his wealth in a fashion rarely ever seen in the past. He has little to no incentive to try and put a floor on the stock price. Buffet has proven to be a value investor and has not made a share repurchase in ALL these years. As always he looks out for the best of his shareholders, and if Berkshire shares look to be a good value, I will trust the Oracle of Omaha. He has EARNED that trust over his incredible track record, which is longer than many of us "fools" have been alive.

  • Report this Comment On September 26, 2011, at 8:46 PM, shoemaker17 wrote:

    buying back stock until the price is 10% more than tangible book? what a novel idea. I wonder where the stock market would be if others took such a simplistic approach... IM LOOKING AT YOU IMMELT!!!

  • Report this Comment On September 26, 2011, at 10:29 PM, DDRealist wrote:

    "Bullish"?

    Actually, I think Warren's universe of investments both private and public sectors is extremely limited given BRK's size and enormous cash pile.

    Giving back to shareholders through share repurchases is a logical choice.

  • Report this Comment On September 26, 2011, at 10:52 PM, RUKIDDINGME wrote:

    Buffet style value investing with you Fools over the past 8 years has me retired, secure and enjoying a world of choices. I have Learned more over these years than any BA and MA combined. This has been at a cost so low as to be almost silly.

    Thanks guys!

  • Report this Comment On September 27, 2011, at 12:47 AM, XMFTheGuruEbby wrote:

    Great article, Morgan! Truly enjoyed it.

    TMFGuruEbby

  • Report this Comment On September 27, 2011, at 3:54 AM, Stoneaa wrote:

    Berkshire starts only to run if the stock holdings of Warren Buffett increase. Here is a current portfolio update of Warren Buffett - Berkshire Hathaway - portfolio movements as of Q2/2011 (June 30, 2011).

    http://long-term-investments.blogspot.com/2011/08/warren-buf...

    In total, he has 27 stocks with a total portfolio worth of USD 52,357,493,000. I am skeptical that most of his investments will grow faster than the market. I believe that the financial sector must recover first. BAC could be a big bonanza for Warren.

  • Report this Comment On September 27, 2011, at 11:36 AM, Guesstimator wrote:

    When Buffett diluted BRK-B shares, he did it to purchase Burlington Northern, betting on the economy. Regardless of current unemployment figures and Eurozone jitters, the economy is doing reasonably well, given the S&P 500 profits to date. His injection of cash into BAC may prove to be a good deal as well, as BAC has written off a large part of its bad mortgages and may soon be free of government restrictions and writeoffs.. If Buffett is right (and who wants to bet against him), this might be a very good time to have A or B shares.

  • Report this Comment On September 29, 2011, at 10:39 AM, karlm1 wrote:

    While this puts a realistic bottom on the shares it may also put a ceiling on them. Of coarse as it trades over 10% book value Buffet will be purchasing no shares and others will be reluctant to purchase them as well. After all what he almost said was its worth no more 10% over book. Any more than that is too expensive.

  • Report this Comment On September 29, 2011, at 10:48 AM, TheDumbMoney wrote:

    @Guestimator: "When Buffett diluted BRK-B shares..."

    Buffett did not dilute BRK-B shares. He split BRK-B class shares.

    Please go to one of the last remaining book stores and find the title within the famous series of yellow (one series) or orange (the other series) of instructional books that talk about investing using large print and lots of pictures.

  • Report this Comment On October 01, 2011, at 10:07 PM, sagitarius84 wrote:

    I remember last time Buffett got bullish on Berkshire. In 1960s he bought it in the teens, and in 1999 he was almost ready to buy it at $40K/share..

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