Market volatility beginning late last month reached even stalwart Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) and created a scenario close to the type in which owner Warren Buffett (Trades, Portfolio) said he would repurchase shares.
The massive, $325.6 billion insurance conglomerate generally followed the stimulus-fueled rally in the market over the past five years, advancing 67.8% compared to an 82.9% rise for the S&P 500 Index. After moving only a few percentage points during the past year, the market contraction last week then brought the stock down to a 52-week low of $190,007.
Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) have written in their shareholder letters several times that they would repurchase Berkshire shares if certain criteria were met. First, in 2010, they said they would buy if the price fell to within 110% of book value. They raised the requirement in 2011 to 120%, saying the original limit “proved unrealistic.”
At Berkshire’s book value of $149,745 at second quarter-end, last week’s year-low price fell within 127% of book value. The share price has since climbed to $199,665 per share at close Thursday, pricing them around 133% above book value, still slightly higher than Buffett’s requirement.
Buffett also said in his 2013 letter that “Berkshire’s intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recently years.” Purchasing shares at 120% above book value “made sense,” he said, “because per-share intrinsic value exceeds that percentage of book value by a meaningful amount.” Berkshire’s shares have therefore traded at or slightly above intrinsic value in the past week by Buffett’s estimation.
Buffett will also only buyback shares if cash on his company’s balance sheet exceeded $20 billion, he said. His stockpile totaled around $66.6 billion at the end of the second quarter.
Buffett last announced a purchase of his company’s stock in December 2012, when the price declined to around 116% of book value.
“But never forget: In repurchase decisions, price is all-important,” he said in his shareholder letter from the time. “Value is destroyed when purchases are made above intrinsic value. The directors and I believe that continuing shareholders are benefitted in a meaningful way by purchases up to our 120% limit.”
Buffett spent $4.5 billion on a stake in Phillips 66 (PSX, Financial) last week but has not announced any share repurchases of his own company.
David Rolfe (Trades, Portfolio), CIO of Wedgewood Partners, whose largest holding is Berkshire Hathaway B-shares, noted the significance of this week’s price decline on CNBC Wednesday.
“You’re buying the stock right now a little more than 1.3 times book, and the old man Buffett himself said that at 1.2 times book he’d be a buyer in size himself,” he said. “So it’s rare that you get Berkshire this cheap. And again, it’s a solid grower. It’s going to be a GDP-plus grower.”
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