I have been speculating for some time that Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), led by Warren Buffett (Trades, Portfolio), would have been exceptionally active buying back its own stock in fourth-quarter 2018 to make the most of market weakness and spend cash on what Buffett has always thought to be a desirable acquisition target.
When the company published its numbers for the quarter and full year over the weekend, however, the lack of sizable buyback activity was notable.
Buffett's buybacks
According to my research, Berkshire spent around $420 million buying back stock during the period, a nominal sum compared to the conglomerate's $112 billion cash pile and $498 billion market capitalization. When added to the funds already spent in the third quarter of 2018 (approximately $1 billion), this means Buffett has deployed a total of $1.5 billion since he and Charlie Munger (Trades, Portfolio) changed the share repurchase policy last summer.
I would say it is disappointing to see such muted buyback activity, but I don't think that is the right word to use. Interesting might be a better description. It is interesting to note Buffett has not been more active, especially when Class A shares of Berkshire Hathaway traded as low as $280,000 (around $186 for the B shares) in the last few weeks of the year.
When I've considered Buffett's buyback activity in the past, I've always considered the range he is willing to buy in. I think it is pointless to try and calculate any exact values as we just don't have the data available.
According to an analysis by Barrons: "The bulk of Berkshire’s stock buybacks in the fourth quarter occurred between Dec. 13 and Dec. 24, when the company repurchased 790 class A shares at average price of around $296,000 per share for a total of $233 million." That's according to the company's annual report. This accounts for only half the total spend, but it does give us a great idea of Buffett's estimate of intrinsic value for the company.
In the third quarter, Berkshire stock didn't trade below $290,000. It was trading below this level before July 17, when Buffett and Munger changed the repurchase policy, but shot up straight after. At the beginning of August, the stock leapt above $310,000. I don't think it's unreasonable to assume Buffett was buying immediately after he changed the policy and stopped after the stock jumped above $310,000. When overlaid with the buying data from the fourth quarter, it seems reasonable to suggest Buffett thinks anything under $300,000 per A share is attractive. That is around 1.4 times book, which was $212,503 per class A share at the end of 2018 (though, as Buffett no longer uses book value to evaluate repurchases, this is irrelevant).
Shareholder letter
There is also a chance Buffett was taking repurchases slowly after changing the rules because he wanted an opportunity to explain his methodology to investors in the year-end letter. I don't think this is too much of an outlandish statement to make because the Oracle of Omaha has always put Berkshire's shareholders first and tried to keep them informed of all significant decisions.
As he only writes to investors once a year, he would have had to wait for the year-end letter to explain his convictions. Indeed, Buffett said in his letter:
"When a company says that it contemplates repurchases, it’s vital that all shareholder-partners be given the information they need to make an intelligent estimate of value. Providing that information is what Charlie and I try to do in this report. We do not want a partner to sell shares back to the company because he or she has been misled or inadequately informed."
With this in mind, I also don't think it is unreasonable to assume buyback activity will pick up in 2019. I make this statement based on Buffett's comment in the letter:
"It is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value."
It will be interesting to see how this theme plays out in 2019. One thing is for sure based on Buffett's activity so far, though: he thinks Berkshire stock is cheap under $300,000.
Disclosure: The author owns shares of Berkshire Hathaway.
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