On Sept. 26, 2011, Berkshire’s board authorized the repurchase of Class A and Class B shares under two conditions: if the prices were not higher than a 10% premium of the company’s book value per share and if the purchase did not reduce the company’s cash holdings to below $20 billion.
At the time of the authorization announcement, the company said, “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.”
The amount it repurchased would depend on its cash balance, the attractiveness of other investment and business opportunities, and how much the managers believed the shares were discounted compared to intrinsic value.
The board authorized the actual repurchase at $131,000, “coincident with raising the price limit for repurchases to 120% of book value.”
The latest reported book value in the third quarter was $114,590 per share. The company could not repurchase at the current price under the former authorization, as a 10% premium is $126,049. The 120% maximum would allow share repurchases up to the price of $137,508.
More share repurchases may follow, though the company expressed no specific plans. There is currently no time limit on the authorization.
“Berkshire may purchase additional shares in the market or through direct offerings at no more than 120% of book value,” it said.
Berkshire Hathaway stock had increased 14% from the beginning of the year through Dec. 11. The shares then surged 3% on Wednesday’s news of the buyback to trade for $134,564.
Over the last five years, the company’s shares have declined 9%. Over the same time period its revenue per share increased at an annual rate of 5.2%, free cash flow at 19.3% and book value at 8.1%. It has about $82.4 billion in cash on its balance sheet, up from $68.6 billion a year ago, and no debt. See its 10-year financial page here.
Berkshire has a P/E of 16.3, P/B of 1.2 and P/S of 1.4.
Buffett has previously said that CEOs should repurchase only when shares fall below intrinsic value. Based on his former comments in his shareholder letter, the buyback indicates he believes his shares currently trade at a discount:
Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation - whether the money is slated for acquisitions or share repurchases - is that what is smart at one price is dumb at another.
Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like making money for continuing shareholders, and there is no surer way to do that than by buying an asset - our own stock - that we know to be worth at least x for less than that - for .9x, .8x or even lower. (As one of our directors says, it's like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)
See Warren Buffett’s portfolio here. Also check out the undervalued stocks, top growth companies and high yield stocks of Warren Buffett.