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When a company buys back its own shares and is not re-issuing them, it means some bottom line improvement to equity per share of the rest of the shares still in circulation. In our present market place where Fear Incorporated is marketing the end of the world, the end of the dollar, the end capitalism and the end of the end, you probably can't find a mutual fund or another stock any better than Berkshire Hathaway to ride out the prophesies of burning and crashing we have to listen to every day in the financial media.
It was quite inspiring to learn that money-losing Goldman Sachs "controls the world" and that soon not only will most people lose all their financial assets, but people will be able to make bigger money than ever with futures and options trading and by hoarding gold and silver (now in a free fall). It is amazing that that BBC piece about Goldman controlling the world went viral as it did. The underlying message is that one needs to buy that guy's book or pay to take his pre-recorded crash course on making money in the inevitable implosion of capitalism.
What he does not tell you is that futures and options trades can be instantly retracted and voided if we have an American Bolshevik revolution with Obama becoming our new Leninist president having canceled the elections of 2012. It is hard to forget how stupid people were paying any attention to the Y2K prophecies. No records exist for how many actually crawled down a hole and lost all their assets in doing so when Y2k fizzled, but I am fairly certain that no Mayan prophesy of 2012 being the end of the world is born out by any known statistical probability that it won't be 2013 or 7985. If you are looking for a solid company that is already worth more than it is trading for (on the day you are buying it, which means checking the price before buying) a great candidate would be a blue chip of blue chips, Berkshire Hathaway.
The price Berkshire has probably declined because there are too many shares in circulation, and partly because many of the big long-time owners don't receive dividends. Therefore, when they need to raise cash, they have no choice but to sell shares. As the average age of the big older holders goes up, they should need to do more selling. Berkshire will be buying from family essentially or could even be buying Buffett's shares.
The Burlington Northern deal and the need to put out more B shares to acquire its shareholders' lots put even more shares into the trading ring. They are also sloshing around with speculators able to short the shares, which is not easy for them to do with the hugely expensive A shares. That explains the volatility and decline in the share price — not to discount the financial sector getting hit hard by the fear franchise incorporated telling us all they have magical powers to predict a double dip recession.
I can't predict a major new recession nor how long it might last, but the fear franchise says it knows and everyone knows they are master market timers. A few may be, but that is not what the long-term statistics show. We saw Goldman Sachs, Bear Sterns and Lehman Brothers do very well year after year in their market timing schemes and then just two years ago, all three were almost worth zero. Had there been no TARP money, many more of the biggest companies would have become big zeros. The only bank worth its salt was Berkshire Hathaway in the last financial crash because it had the cash flow and reserves to offer survivability insurance to companies like GE (GE) and Goldman. Berkshire Hathaway is still in great shape and should be able to weather the storm.
In the mean time, buying up shares should help shore up value and get rid of some of the pesky short sellers. In due time if the shares remain weak it may be cause for dividends to start being paid out, particularly where Buffett is endowing non-profit organizations with shares. If he does not want them all just going out to raise cash by selling endowment shares he might need a significant dividend that they might consider selling other shares with smaller dividends.
Or there could also be a reverse stock split. Warren Buffett's love of the estate tax is one thing to worry about when it comes to Berkshire Hathaway shares in the future. As the older, larger shareholders who have not sold shares over many years start to die off, the estates will be forced to sell shares for taxes and distributions. This could counteract any benefit in the company repurchasing shares because much A-share selling and conversion to B shares is inevitable. A dividend would help prevent some of these sales. The U.S. government will become a major beneficiary of sales of Berkshire Shares cash due to estate taxes, which could mean some wild trading — maybe even further below book value than seen today.
The probability of an eventual dividend payout is increasing and is one more reason to buy the shares. That is a positive and a negative or a recurring tax liability. In a way, it may be better with estate taxes putting too many shares on the market within the next 15 years. There is also the possibility that the company will break up into separate corporations, separating out financial and industrial parts of the company or high and low growth segments so the dividends only come from one side of the company.
Breaking up the shares will happen inevitably after the passing of Buffett. It makes sense that parts of the company are separated from an insurance risk stand point and especially because of Dodd Frank, which states that financial companies have to come up with their own liquidation plans in case of insolvency. Any company can become insolvent — good and bad alike. Breaking up Berkshire into Berkshire and Hathaway to start would firewall investors' equity from an insurance blow up or break down. A break up of Berkshire means the company might trade at more than twice what it trades at today just by seeing it trade in multiples of book value as other companies trade at.
Berkshire Hathaway is a buy if Buffett is buying or if Berkshire Hathaway is buying. It is not necessarily a no-brainer because Berkshire Hathaway is not going to be trading at two or three times book value as some other companies do. The upside is limited and a long-term process.
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