Regular readers of my articles will know that I have been keeping a close eye on the share buyback activity of Warren Buffett (Trades, Portfolio) and Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) over the past few years.
Ever since the board of Berkshire voted to change the conglomerate's share buyback policy, I have been keeping watch for how much money the Oracle of Omaha has been willing to devote to buying back the group's stock.
Useful information
This information is useful for two reasons. First of all, it gives us some insight into Buffett's view of the global market environment. Buffett has repeatedly stated that he will only use cash to repurchase shares if there are no other opportunities in the market. The fact that he has deployed capital for this purpose over the past 24 months tells us that he believes the market has been hugely overvalued.
Second of all, Berkshire's share repurchase activity gives us some insight into Buffett's estimate of intrinsic value for the business. He has stated before that he is only willing to pull the trigger on share buybacks when shares in the conglomerate are trading at a discount to intrinsic value.
Thus, by looking at the level of repurchases, we can get some idea as to what Buffett considers to be the a discount to the intrinsic value of Berkshire.
In the past, I have assumed that a discount of between 10% and 20% would be appropriate for the Oracle of Omaha. Using this, I've calculated a rough estimate of the intrinsic value of the business.
Ramping up buybacks
In 2018, Berkshire spent $1.3 billion buying back its own shares - a modest amount considering the group's $100 billion+ cash pile.
However, Buffett was able to deploy more capital for this purpose in 2019. According to his 2019 shareholder letter, Berkshire spent $5 billion buying back its shares throughout the year:
"In past reports, we've discussed both the sense and nonsense of stock repurchases. Our thinking, boiled down: Berkshire will buy back its stock only if a) Charlie and I believe that it is selling for less than it is worth and b) the company, upon completing the repurchase, is left with ample cash.
Calculations of intrinsic value are far from precise. Consequently, neither of us feels any urgency to buy an estimated $1 of value for a very real 95 cents. In 2019, the Berkshire price/value equation was modestly favorable at times, and we spent $5 billion in repurchasing about 1% of the company.
Over time, we want Berkshire's share count to go down. If the price-to-value discount (as we estimate it) widens, we will likely become more aggressive in purchasing shares. We will not, however, prop the stock at any level."
Interestingly, it would appear that the Oracle of Omaha is becoming more receptive to spending Berkshire's massive cash pile on buybacks.
In his letter, after stating the above, he went on to issue a call for shareholders with "at least $20 million" in value of A or B shares and "an inclination to sell to Berkshire" to call the group's Director of Financial Assets, Mark Millard between "8:00-8:30 a.m. or 3:00-3:30 p.m. Central Time." This is the first time an announcement like this has ever appeared in Buffett's letters.
In the fourth quarter of 2019, Berkshire acquired several million B shares and more than 2,000 A shares at prices between $204 and $222 for the B shares and $306,000 to $333,300 for the A shares.
With the A and B shares trading at $328,000 and $218 per share, respectively, at the time of writing, there's a good chance Berkshire could be buying back stock once again this week.
The recent share price decline, coupled with Buffett's comments in his annual letter to shareholders, suggests that the company may now take advantage of any opportunity offered.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- A Look at Berkshire Hathaway's Insurance Performance in 2019
- Warren Buffett's Trades Show Some Interesting Themes in 2019
- Warren Buffett: Don't Overlook Retained Earnings
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