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Warren Buffett Finds Berkshire Share Valuation Attractive, Completes Buyback

December 12, 2012 | About:
Holly LaFon

Holly LaFon

250 followers
More than a year after it authorized its share repurchase, Berkshire Hathaway (BRK.A)(BRK.B) has bought back its own shares. Warren Buffett’s company announced today that it would purchase 9,200 of its Class A shares for $131,000 each. The shares it repurchased were from the estate of a long-time shareholder.

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.


Rating: 3.5/5 (17 votes)

Comments

hardcorevalue
Hardcorevalue - 1 year ago
FYI buffett had bought back shares before.

Glad to see buffett raising the buyback level!
hardcorevalue
Hardcorevalue - 1 year ago
Very welcome news eh!
paulwitt
Paulwitt - 1 year ago
The information below was copied from another website:

By Ben Berkowitz and Lauren Tara LaCapra


Wed Dec 12, 2012 3:28pm EST


(Reuters) - Warren Buffett's conglomerate Berkshire Hathaway Inc (BRKa.N) bought back $1.2 billion in stock from the estate of an unnamed investor, the company said on Wednesday, one day after Buffett advocated for a higher estate tax when the wealthy die.

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