Warren Buffett (Trades, Portfolio) this week said that his company, Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), could use its massive cash stockpile to buy back up to $100 billion of its shares, roughly a hundred times more than the amount it spent on repurchases last year.
Speaking to The Financial Times, Buffett said he faced a dearth of investable companies but said he still rejected the idea of using some of its cash to pay shareholders a dividend. Investors also voted against a dividend payout in 2014.
Berkshire ended the quarter with $112 billion in cash and cash equivalents on its balance sheet. The mountain is near record height, but was higher at the end of 2018, when the company reported having $116 billion in cash.
Buffett is unlikely to make a $100 billion repurchase soon, considering his former long-standing repurchase policy prevented share repurchase amounts from reducing balance sheet cash below $20 billion. The price would also have to be right.
“The only way Buffett will countenance reducing the company’s massive pile of shareholder equity is to buy back shares when they are selling at a price he thinks is lower than their true value,” The Financial Times reported Buffett saying. “This amounts, in his view, to buying out a partner at an attractive price.”
Berkshire Hathaway B-class shares traded at $214.22 Friday, up 4.51% for the year, versus a 16.74% surge in the S&P 500 index. It last announced making share repurchases in the amount of $900 million in the third quarter of 2018, when the price averaged $205 per share.
Buffett made those repurchases after Berkshire’s board eased restrictions on its buyback policy. Under the new rule, Buffett or Vice Chairman Charlie Munger (Trades, Portfolio) could buy back shares when they deemed their price “below Berkshire’s intrinsic value,” using a “conservative” estimate. Previously, the company permitted repurchases only when the stock price fell below 1.2 times book value per share.
Although Buffett has long supported the idea of share repurchases, he rarely executed them for his own company when the market offered more attractive whole businesses to buy outright. He spent $1.2 billion on Berkshire shares in December 2012, when he expanded the range to 1.2 times book value from 1.1 times, and disclosed no other repurchases before then.
Buffett, who has to spend large sums of cash to make a gain for his giant company, has not announced the acquisition of a whole company since it bought Precision Castparts for $37.2 billion in January 2016. He and his two portfolio managers, Ted Weschler and Todd Combs, have continued to unearth publicly traded stocks to buy. They bought three positions in the fourth quarter – Red Hat Inc. (RHT, Financial), Suncor Energy Inc. (SU, Financial) and StoneCo Ltd. (STNE, Financial) – but the amounts were relatively small, at less than $1 billion each. His stake in Apple (AAPL, Financial) also totaled around $40 billion.
But when Berkshire’s stock catches up to where Buffett thinks it should be and other stocks are expensive, he will face the real conundrum. “That’s my nightmare,” he told The Financial Times.
See Warren Buffett (Trades, Portfolio)'s portfolio here.
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