In a rare move, Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) acquired nearly $1 billion of its own shares during the third quarter, it announced on Saturday as part of its earnings results.
The buyback is the first since Berkshire loosened its policy on July 17 to allow repurchases any time Buffett or Vice-Chairman Charlie Munger (Trades, Portfolio) deem the stock undervalued. Previously, the company prohibited buybacks unless the share price dipped below 120% of book value.
Berkshire’s $928 million repurchase signals that Buffett calculates the value of the company above $309,675 per share, the average price it traded during the third quarter. That level significantly exceeded the price at 120% of second-quarter book value of $262,020 per share.
If Buffett had waited for the stock to fall within 120% under the previous rule, the buybacks would not have occurred. The stock drifted to its lowest point of the year in June, falling to $281,600 per share, before marching back up to a third-quarter peak of $333,415 in September. Shares reached their high for the year and for all time of $335,630 in October.
Buffett had disclosed that he repurchased “a little” of Berkshire’s stock back in August, confirming to investors that he believed it was trading for less than it was worth.
"What really counts is what are the businesses worth along with the securities we own? And if it's at a discount to that figure Charlie [Munger] and I will buy, and we bought some," he told CNBC at the time.
The large buyback offered a clarion call to buy for investors who view stocks as pieces of a business, as it narrows a number range of the company’s worth from a highly reliable insider. Buffett has traditionally kept quiet about any exact figures for his estimate of Berkshire’s value.
The market responded positively, sending Berkshire stock up 5.03% to $323,935 per share on Monday afternoon, versus a 0.56% rise in the S&P 500 index. It is up 4.28% for the year to date, against a 1.01% gain in the index.
The insurance-focused conglomerate Buffett has grown from a struggling textile mill since 1965 owns 63 subsidiaries, $195.6 billion in common stock and more than $100 billion in cash as of third quarter-end.
Buffett has noted that the value of the vast empire has increasingly outpaced the book value of its assets since the early 1990s when he trended toward buying whole companies and accounting rules forced him to record more of their losses than successes. Generally accepted account principles (GAAP) required him to revise the carrying value of poor businesses downward while not revaluing flourishing businesses higher.
In a 2017 letter, Buffett said that Berkshire’s intrinsic value “far exceeds” its book value, particularly in the property and casualty insurance businesses.
“Over time, stock prices gravitate toward intrinsic value,” he said. “That’s what has happened at Berkshire, a fact explaining why the company’s 52-year market-price gain … materially exceeds its book-value gain.”
From 1964 to 2017, Berkshire’s overall gain in book value totaled 1,088,029% compounded at 19.1% annually versus a gain in market value of 2,404,748% compounded at 20.9% annually. For the same period, the S&P 500 advanced 15,508% or 9.9% compounded annually.
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