Regular readers of my articles will know that I have been keeping a close eye on the share repurchase activity of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) ever since the conglomerate changed its buyback mandate in July 2018.
The new policy, as displayed in the group's first-quarter earnings report, is as follows:
"Berkshire's common stock repurchase program permits Berkshire to repurchase its Class A and Class B shares any time that Warren Buffett (Trades, Portfolio), Berkshire's Chairman of the Board and Chief Executive Officer, and Charlie Munger (Trades, Portfolio), Vice Chairman of the Board, believe that the repurchase price is below Berkshire's intrinsic value, conservatively determined. The program continues to allow share repurchases in the open market or through privately negotiated transactions and does not specify a maximum number of shares to be repurchased. However, repurchases will not be made if they would reduce the total value of Berkshire's consolidated cash, cash equivalents and US Treasury Bills holdings below $20 billion. The repurchase program does not obligate Berkshire to repurchase any specific dollar amount or number of Class A or Class B shares and there is no expiration date to the program."
When Buffett initially announced the changes to this policy, many analysts and investors expected the Oracle of Omaha to spend tens of billions of dollars repurchasing the group's shares. After all, Berkshire's cash balance has swelled to above $130 billion. This gives the business plenty of firepower to spend on repurchasing shares without breaching its $20 billion minimum cash level.
But that hasn't happened. Berkshire spent $5 billion purchasing its own stock in 2019. In the first three months of this year, Berkshire paid $1.7 billion to repurchase shares of Class A and B common stock.
While this activity is less than some Buffett watchers expected, the CEO of Berkshire is spending more. In the fourth quarter of 2019, Buffett deployed $2.2 billion, the highest level since changing the policy. The total spent in the first three months of 2020, $1.7 billion, was not far off.
I think it is highly likely that we will see an uptick in activity in the second quarter of this year. Berkshire was buying back shares in the market during the first three months of the year up until March 10. It paid prices of between $226 to $214 per B share and $339,000 to $301,000 per A Share (on average) in the market.
Berkshire shares on offer
If Buffett was willing to pay up to $226 per B share, he will likely be interested in the stock at current levels ($176 as of the writing of this article). The stock price even dropped as low as $160 towards the end of March.
However, the CEO's hands were tied by SEC restrictions towards the end of last month. The buyback blackout period generally lasts from the previous two weeks of the quarter until 48 hours after the company announces the quarter's earnings results. While there is no federally-mandated requirement for a company to adhere to this, and some businesses do set rules enabling them to buy shares during the period, Buffett has always tried to be strict when it comes to navigating rules and regulations. This tallies with the fact that Berkshire did not repurchase any of its shares after March 10, even though the stock dropped to levels not seen for several years.
Thus, we are likely going to see an increase in repurchase activity in Berkshire's second-quarter earnings report. Buffett's tone sounded quite cautious in the recent annual meeting, so he may not want to deploy too much capital, but he's also said that he cannot find any other attractive opportunities in the current market. However, we'll have to wait to find out.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Some Thoughts on Why Value Investing is Underperforming in 2020
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