Berkshire Hathaway (BRK.A -1.43%) (BRK.B -1.50%) has bought back tens of billions of dollars of stock over the past few years. In fact, the conglomerate has spent more on buying back its own stock than it has on any other investment since the current version of its buyback plan started in 2018.
However, Berkshire's third-quarter buybacks were significantly lower than other recent quarters. In the first quarter of 2023, Berkshire spent about $4.4 billion on buybacks, and in the second quarter, it spent another $1.4 billion. But in the third quarter, the buyback pace slowed even further to $1.1 billion. Since buybacks are generally indicative of management thinking the company's stock is attractive, is CEO Warren Buffett trying to signal something about Berkshire's current valuation?
Berkshire's buyback program
A few years ago, Berkshire Hathaway made a big change to its share repurchase program. Previously, buybacks were only authorized when the stock traded below 120% of its book value. However, with book value becoming a less relevant valuation metric for Berkshire's business over the years, it was time for a change.
In 2018, the company's buyback program was modified. Now, buybacks are approved as long as two conditions are met:
- Buybacks don't reduce Berkshire's cash and equivalents below a $30 billion cushion.
- Both Buffett and Vice Chairman Charlie Munger agree that the current stock price is below a conservative estimate of the company's intrinsic value.
The first condition isn't an issue and hasn't been for many years for Berkshire. In fact, at the end of the third quarter, Berkshire's cash and equivalents exceeded $157 billion -- the highest level ever.
The second condition is clearly subject to interpretation, and it's not known how Buffett and Munger calculate the intrinsic value of Berkshire at any given time. But the key point is that if there are buybacks happening at all, it means that both believe it is trading at a discount. The pace of buybacks was generally slower in the third quarter, but it's important to mention that buybacks took place in all three months of the quarter.
In fact, the most aggressive buybacks took place in September, when Berkshire was trading at the highest average stock price of the three-month period. During September, Berkshire repurchased $665 million out of the $1.1 billion quarterly total, and at an average (Class B equivalent) price of about $366 per share. (Note: About 90% of September buybacks were in the form of Berkshire's Class A shares, at an average price of $550,813.96. And one Class A share is the economic equivalent of 1,500 Class B shares.)
Is Berkshire Hathaway still a good investment?
To be sure, there's more to consider when deciding whether a stock is a good value or not than buybacks. And it's important to mention that my general position is that if you want a rock-solid business with the potential for long-term returns that outpace the market, it's rarely a bad time to buy Berkshire.
Having said that, based on the buyback activity, it's clear that both Buffett and Munger believed that the stock was a good value in September at an average price of about $366 per share. We obviously don't know Buffett's thought process or what might be going on behind the scenes at Berkshire right now. However, with Berkshire trading for about $350 per share as I'm writing this, it's fair to say that if Buffett thought Berkshire was below its intrinsic value a couple of months ago, he likely feels the same today.