Berkshire: Not All Buybacks Are Created Equal
- Joshua M Brown
- September 26th, 2011
Real quick on the Berkshire Hathaway stock buyback announced this morning…
Details first (via FT Alphaville):
Berkshire Hathaway Inc. (NYSE: BRK.A; BRK.B)—Our Board of Directors has authorized Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest.
Berkshire plans to use cash on hand to fund repurchases, and repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire.
Full disclosure, I’m long Berkshire Hathaway B shares for client and family accounts and have been forever and a day, so of course I’m thrilled with the news this morning.
Normally I detest buybacks. The primary reasons are:
They usually occur at the top of a cycle and are a sign of a top when they peak en masse
They usually are used to mask massive stock option issuance to enrich insiders while doing nothing other than offsetting dilution to shareholders
They are financial engineering and are thus suspect
They are inferior to dividends
They can be a sign that management has no idea what to do to grow or improve a business
But Buffett is not masking stock issuance, he is purely concerned with building shareholder value and sees an investment in his own stock (and hence the various companies he owns) as the best use of capital. This is very different from when Cisco issues 50 million in options and then announces the requisite buyback that would offset it.
The way BRK is set up, Buffett can essentially run an NAV calculation like a mutual fund of all his holdings and determine the discount he thinks he’s trading at. Or he can simply look at his book value per share for that determination which seems to be the case here. Since Buffett is in the business of enriching shareholders and not an army of VPs like many other Fortune 500 stock-issuance machines, I can sign off on this one – as if he cares
The Berkshire buyback is kosher, period end of story. Now go take a bath.
I discussed the buyback thing a few weeks ago live on CNBC, hilarity ensued. Watch Below:
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.