Reuters recently reported that Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) has reduced its share count by 1.2% since April 23, suggesting that Chairman Warren Buffett (Trades, Portfolio) might have become more aggressive in repurchasing the undervalued stock.
The reduction in Berkshire's outstanding shares was noted in a regulatory filing on July 7 concerning Buffett's $2.9 billion donations of Berkshire stock to five nonprofit organizations, part of his pledge to give away nearly all his wealth. Berkshire's previous buybacks totaled about $8 billion, including $1.7 billion from January to March, as the pandemic drove down the price. According to the filing, Buffett owned the equivalent of 248,741 Class A shares, a 15.54% stake, following his donations. That suggests Berkshire had the equivalent of just over 1.6 million Class A shares outstanding, down roughly 19,000 from April 23.
Buffett was asked at Berkshire's 2020 annual meeting of shareholders why he had not repurchased more stock. He replied that the price had not fallen to "where it really feels way better to us than other things, including the option value of money, to step up in a big, big way."
Berkshire has since purchased about $4 Billion of natural gas assets from Dominion Energy. Now with the stock market up and Berkshire's stock looking undervalued on a book value basis, it appears that Berkshire now considers it time to step up its buyback of shares.
For options investors, I think this might be an opportune time to write "at the money" puts on Berkshire Hathaway. Not only are Berkshire's shares undervalued, but as the company buys back shares, the probability of these puts expiring without being exercised is good.
For example, with the shares currently at ~$190, you could sell a $195 put expiring on June 18, 2021 for $20.80 (quote as of July 14, 2020).
If the stock is above this level by June 18 next year, you get to keep the premium. If not, you will be required to buy the stock at $195. My opinion is that given Berkshire's valuation and buyback activity, it is more likely to be the former. I think this strategy is a relatively safe way to navigate the current market, so that's why I've put my money where my mouth is on this one.
Disclosure: The author is long BRK.B via options. Investors should ensure they thoroughly understand the concepts behind options trading before engaging in this kind of investment activity.
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