Berkshire Hathaway's (BRK.A -1.14%) (BRK.B -1.07%) board just decided to give CEO Warren Buffett and Vice Chairman Charlie Munger quite a bit more freedom when it comes to buying back stock. Here's a rundown of the amended buyback plan and what it could mean to Berkshire's shareholders.
A full transcript follows the video.
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This video was recorded on Aug. 6, 2018.
Shannon Jones: Which brings us to the point of buybacks. When it comes to deploying cash, you have, first of all, a lack of attractive targets, you have this growing stockpile cash. Berkshire just announced it's changing its policy when it comes to buying back its own shares. Let's talk about what exactly is changing when it comes to that policy, and what that actually means for investors.
Matt Frankel: Berkshire has always had a buyback policy where they're allowed to buy back shares. The problem is, Buffett wasn't allowed to buy back any shares unless they were trading for 120% of book value or less. The problem is, that hasn't happened in several years. The board thought that the 120% level was significantly below intrinsic value. Buffett agreed. He was very eager to buy back shares if it ever got to that point. But, with how well the stock market has been doing, it really hasn't. That took the buyback option out of Buffett's toolbox.
Now, what they just did is, the board approved an amendment. They scrapped that 120% of book value limit. For context, the stock is currently around 140% of book value, so, not a ton above, but still too high to buy back under the old arrangement. Now, they're allowed to buy back shares any time that Warren Buffett and vice-chairman Charlie Munger agree that the shares are, indeed, below their intrinsic value. There's no limit to how many shares they can acquire, there's no time limit. This is in effect until the board changes it again.
It's interesting to note that today is the first day they're allowed to buy back shares under that new arrangement. One of the conditions was, they had to wait until their second quarter earnings were released, which happened on Saturday, and today is Monday. So, they could actually be buying back shares as we speak.
Jones: Matt, the inevitable question is, do you see Warren Buffett, Berkshire Hathaway, buying back shares any time soon?
Frankel: Yes, and I'll tell you why. Berkshire's total market cap as I wrote this, I ran some of the numbers, is about $514 billion. Of that, about $206 billion of it is his stock portfolio. Another $111 billion of it, as we mentioned, is cash. That means the market is valuing all of Berkshire's other businesses, all 60 or so of them -- Geico, Duracell, the railroad, etc. -- at less than $200 billion. I believe that's less than their intrinsic value.
Whether Buffett and Munger believe that remains to be seen. As you mentioned, Buffett wants a deal. Whenever he's buying anything, whether it's an entire company, a stock, or shares of Berkshire, he wants a deal.
Do I think it's a compelling value? Yes. I'm a Berkshire shareholder. I think the shares are attractively priced at the current level. But will Buffett? That remains to be seen. Not only could they be buying back shares right now, but they could end up giving us some insight as to how much Buffett and Munger think Berkshire shares are actually worth -- in other words, how high will they get before they start buying them back? So, this will be a very interesting development over the next few quarters.
Jones: Yes. Much to keep an eye out on looking ahead. Certainly, we'll be sure to let you know when and if that happens. All in all, Berkshire Hathaway this quarter, continuing to fire on all cylinders, and really making smart and necessary strategic changes that should continue to reward shareholders in the long-term.