Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), the conglomerate led by billionaire investor Warren Buffett, has been grappling with a major cash problem for some time. It's not that the company has too little cash -- it's that it has far too much. In fact, at the end of 2018, Berkshire was sitting on $112 billion in cash and equivalents.
Buffett's preferred use of Berkshire's cash would be to make a big acquisition (or several), but there has been a major shortage of attractive opportunities in recent years. He also likes buying common stocks, but the same valuation problem exists.
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Stock buybacks are another option, and Buffett recently hinted that Berkshire could begin using share buybacks on a much larger scale than it has been.
In a recent Financial Times interview, Buffett said that Berkshire could repurchase as much as $100 billion of its stock. And while Buffett didn't say when or how fast these buybacks could happen, this number certainly is worth paying attention to.
Berkshire Hathaway's new and improved buyback policy
If you aren't familiar, Berkshire Hathaway's buyback policy got a major overhaul in 2018.
Previously, there was a set-in-stone buyback rule that allowed Berkshire's management to buy back shares when they were trading for less than 120% of book value. Buffett and Berkshire's board of directors felt that this level was significantly below the intrinsic value of the company. The only problem is that the stock rarely even got close to that level. In fact, the last time Berkshire traded for less than this threshold was early 2013.
So, the board chose to modify the buyback authorization in mid-2018. Now, Berkshire can buy back shares anytime, regardless of price-to-book valuation, as long as both Warren Buffett and Vice Chairman Charlie Munger both agree that it's trading for a substantial discount to its intrinsic value.
While we don't know exactly what the two men believe Berkshire's stock is actually worth, Berkshire's price-to-book multiple ranged from about 1.28 to 1.54 during the third quarter, when Berkshire bought back nearly $1 billion worth of stock. In his most recent letter to shareholders, Buffett also indicated that buybacks would be a significant part of Berkshire's capital usage going forward.
A $100 billion buyback?
So far, Warren Buffett and Berkshire Hathaway haven't been too aggressive when it comes to buying back stock -- at least through the end of 2018. The new buyback policy allowed Buffett to authorize buybacks throughout the second half of 2018, and Buffett definitely dipped his toes in the water.
During the third and fourth quarters, Berkshire repurchased $925 million and $418 million worth of stock, respectively, for a total of a little more than $1.3 billion. This might sound like a lot of money, and it is, but it only represents roughly 0.2% of Berkshire's market cap. In other words, we haven't seen needle-moving buybacks just yet.
However, this could certainly change, and for three main reasons:
- First, Buffett has said that buybacks are a good idea when Berkshire's stock is trading for less than its intrinsic value, and it seems that he feels that way now. After all, Berkshire's stock isn't trading for much more than the average third-quarter buyback price, and Buffett has said investors should expect buybacks to play a larger role in the company's strategy going forward.
- Second, Berkshire's cash pile is getting way too big. At the end of 2018, Berkshire had $112 billion in cash and equivalents, which is $92 billion more than Buffett prefers to keep on hand. Since there haven't been any major acquisitions announced during the first quarter, it's fair to assume that the number has grown even larger.
- Third, it's unlikely Buffett is finding any acquisition opportunities at reasonable prices. Obviously, we don't know the details of any takeover talks Berkshire might be having, but Buffett has said several times over the past couple of years that the biggest obstacle to getting deals done is agreeing on a reasonable takeover price. And with the market sitting just below all-time highs, it seems unlikely that's changed.
Don't expect it to happen overnight
While there's no reason to doubt Buffett's sincerity about the $100 billion buyback figure, it's important to emphasize that he didn't give any sort of time frame. In other words, Berkshire could buy back $100 billion in stock over the next year, five years, 10 years, or 20 years. And, knowing how selective Buffett is about his investments, it's reasonable to think he'd be equally selective when it comes to deploying capital into buybacks.
In short, while Berkshire's buybacks may indeed accelerate as its cash hoard continues to grow, don't expect a $100 billion buyback to happen immediately.
