The Big Berkshire Hathaway Buyback No One Is Talking About

Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) shareholders undoubtedly noticed that the company repurchased a small amount of stock in the fourth quarter, with purchases at prices as high as $207.17 and as low as $197.30 per Class B share. That activity suggests that at prices around $197 to $207, Warren Buffett views Berkshire Hathaway's Class B shares as a bargain.

But there was an equally important Berkshire buyback that went largely unnoticed. This month, Berkshire Hathaway Energy (BH Energy), one of the company's largest operating businesses, spent about $293 million buying back its shares, giving investors rare insight into how Berkshire values one of its most important units.

What's Berkshire Hathaway Energy worth?

Berkshire Hathaway isn't the only owner of BH Energy. The Omaha conglomerate owns most of its shares (roughly 90.9% of the company). Walter Scott Jr., a Berkshire Hathaway board member, and his family own about 8.1% of it. Greg Abel, executive chairman of BH Energy and vice chairman of noninsurance operations at Berkshire Hathaway, owns roughly 1% of it.

Warren Buffett at Berkshire Hathaway's annual shareholder's meeting. Image source: The Motley Fool.

BH Energy shares aren't publicly traded and haven't been since Berkshire acquired its predecessor, MidAmerican Energy, from the public markets. Thus, when owners want to buy or sell shares, they transact with one another, albeit indirectly, by selling shares back to BH Energy. That happened most recently in February 2019, when BH Energy disclosed that it bought back 447,712 shares of stock at a cost of $293 million, or $654 per share.

Using this buyback as a guide, this suggests that BH Energy's equity is worth just over $50 billion, or about 1.7 times book value, 19.5 times earnings in 2018, and 17.5 times earnings in 2017.

An appreciating giant

Since 2015, BH Energy has repurchased stock in all but one year (2016), giving outsiders a glimpse into how BH Energy's owners value it from year to year. Over that period, shares of BH Energy have increased in value from roughly $480 per share to $654 per share.

Data source: Berkshire Hathaway Energy filings. Calculations by author. Value per share rounded to three digits.

An investment for the long haul

Of course, Berkshire Hathaway owns BH Energy as a long-term investment that allows it the opportunity to deploy billions of dollars into (mostly) regulated utility projects on which it can earn a reliable return over the course of decades. The utility business isn't one it got involved in for a quick flip.

Consider that in the 19 years since its acquisition, BH Energy hasn't paid so much as a dime in dividends to its owners. BH Energy's latest annual report notes that it "has not declared or paid any cash dividends to its common shareholders since Berkshire Hathaway acquired an equity ownership interest in [BH Energy] in March 2000, and does not presently anticipate that it will declare any dividends on its common stock in the foreseeable future."

Instead, virtually all the company's earnings power is directed toward additional projects and acquisitions, often putting cash to work in the same year it is earned. A well-oiled machine, BH Energy's cash flows from investing activities in any given year match almost perfectly its cash flows from operations. Berkshire Hathaway, the publicly traded holding company, may have too much cash, but that's never been a problem for BH Energy.

The company's policy of immediately reinvesting in new projects goes a long way to explain why owners who aren't named Berkshire Hathaway occasionally sell shares of BH Energy in negotiated transactions. That it also gives outsiders a view into how some of the energy industry's smartest minds appraise BH Energy is just a convenient wrinkle.

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