Last week, I highlighted the five things investors might want to keep an eye out for in Berkshire Hathway's (BRK.A, Financial) (BRK.B, Financial) third-quarter earnings release. One of these was the conglomerate's share repurchase activity.
During the first half of the year, Buffett used around $6 billion of the group's cash pile to buy back stock, which was below the level many analysts were expecting, especially considering the fact that Berkshire stock traded down to a multi-year low in the first quarter market sell-off.
As such, for the third quarter, analysts weren't expecting much in terms of buybacks from the business. The only forecast I have seen put an estimate of around $3 billion on stock repurchases.
This turned out to be far off the mark. Buffett surprised everyone by splashing out a record amount of $9 billion for share repurchases in the third quarter. Following this spending, Berkshire's buybacks now total $15.7 billion for 2020.
The total looks set to jump further in the fourth quarter. Initial figures suggest that a further $2.4 billion was spent by Berkshire on repurchases from Oct. 1 to Oct. 26. Added to the $15.7 billion already spent, this suggests Buffett has deployed approximately $18.1 billion so far in 2020. Based on the group's market capitalization of $500 billion, that gives a shareholder yield of 3.6%.
Berkshire starts spending
Over the past few years, ever since Berkshire changed its share repurchase policy in 2018, I've been keeping an eye on the conglomerate's buyback activity and trying to work out how much the Oracle of Omaha is willing to pay for the shares he is repurchasing.
These are only rough figures, but I think they provide a bit of insight into Buffett's process for calculating intrinsic value, specifically Berkshire's intrinsic value.
Buffett's decision to spend so much cash on repurchasing stock this year suggests that he is finally willing to deploy large amounts of capital into this activity. As such, there's a high probability he might spend significantly more in the coming weeks and months.
What price would he be willing to pay to buy back the stock? There's no definitive answer to this question. However, in December of last year, Berkshire repurchased 674 Class A Shares at an average price of $333,298 and 953,070 Class B Shares at $221.67. At the time of writing this article, the stock changes hands at around $335,400 for the A Shares and $222.80 for the B Shares. So, it looks as if the Oracle of Omaha would not be put off increasing his repurchases at current levels based on price alone.
Of course, there are multiple other factors to consider. I'm not going to claim to have any specific insight into how Buffett calculates intrinsic value, but Berkshire's shareholder equity has increased this year even on conservative estimates.
Due to repurchases, the share count has also been reduced. This suggests that Buffett's per-share intrinsic value figure is higher today than it was at the end of 2019. Therefore, the company's CEO may be content to continue to deploy capital to this activity for some time to come.
We will have to wait to see what the conglomerate's fourth-quarter earnings report says, but it seems highly likely we will see more repurchases over the next few months. I think Buffett could easily spend as much as $25 billion over the whole of the year, which would give a shareholder yield of around 5% on the current market capitalization.
These are only rough figures, and there are many moving parts to the equation, but the recent activity clearly shows that Buffett thinks Berkshire has been and continues to look cheap. Further repurchases over the next few months will only confirm this viewpoint.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett: Why Politics and Investing Never Mix
- What We Can Learn From Warren Buffett's Purchase of Blue Chip Stamps
- 5 Things to Watch in Berkshire Hathaway's 3rd-Quarter Results​
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