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Holly LaFon
Holly LaFon
Articles (9009)  | Author's Website |

Berkshire's Shares Drop to Near Buffett's Buyback Price

The stock has traded at or slightly above Buffett's estimate of intrinsic value

September 03, 2015 | About:

Market volatility beginning late last month reached even stalwart Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) 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 (NYSE:PSX) 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.”

See more of Buffett and his team’s stock holdings at their portfolio here. Not a Premium Member of GuruFocus? Try it free for 7 days here.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

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Rating: 4.8/5 (4 votes)



Ilikrip - 3 years ago    Report SPAM

Also book value should be higher by 12 bio or so. The Kraft Heinz deal is accounted using the equity method and as such the gain has not been recognized in book. 7 bio of that will have to be recognized next year as they issued stock above par in the Kraft Heinz vehicle. The stock portfolio might have gone down though and might have offset some of this gain. I think selling long dated puts on Brk makes sense as the business produces a lot of cash that will not be paid out and as such book value will keep growing. For the b share Jan 2017 120 puts trade at 8. So your breakeven is 112 , that means 168000 in A terms. To trade there book value must be 168/1.20 =140 ( as Buffett will buy shares at 1.20 of book ) Current book value is 150 , at the same time book will grow by about 12000 per share per year so about 15k till Jan 17 to 165.Thus Very difficult to lose money and it happens to trade there it will be a good purchase longer term.

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