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.
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
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.