Although shares of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) were trading below Warren Buffett (Trades, Portfolio)'s estimate of intrinsic value for the company throughout much of the second quarter 2019, it seems as if the Oracle of Omaha has continued with his policy of only tentative share repurchases.
Before 2018, Berkshire had a common stock repurchase program that allowed the conglomerate to repurchase Class-A and Class-B shares at a price no higher than 20% above the book value of the shares. But, in mid-July 2018, the board authorized an amendment to the program.
Under the terms of the amendment, Berkshire can "repurchase shares any time that Warren Buffett (Trades, Portfolio), Berkshire's chairman of the board and CEO, and Charles Munger, vice chairman of the board, believe that the repurchase price is below Berkshire's intrinsic value, conservatively determined."
Intrinsic value
As I have covered before, since changing the policy, repurchase activity has been relatively limited.
For example, as I wrote back on July 16, during the first quarter of 2019, Berkshire acquired "293 A-shares in February at an average price of $302,622 per share and 595,412 B-shares at an average price of $201.73. It also purchased 965 A-shares at an average price of $304,175 and 592,4418 B-shares at an average price of $200.62 in March."
According to Wall Street analysts, Berkshire spent $1.7 billion buying its own shares in the first quarter of 2019. The group also repurchased some shares during the second half of 2018. In total, including deals done during the first quarter of 2019 and in the second half of 2018, after making the changes to the repurchase policy, Berkshire has spent nearly $3 billion on its shares.
So far, Buffett has authorized repurchases up to a maximum share price of $312,000 per A-share, which leads me to conclude that his estimate of intrinsic value for the business he has built over the past 50 years is above this level. Based on this reasoning, there have been several opportunities since the end of the first quarter to deploy capital and buy back additional stock, but it doesn't look as if the Oracle of Omaha has been prepared to open his wallet.
Second-quarter buying
According to its 10-Q for the second quarter of 2019, Berkshire acquired 281 A-Shares between the beginning of April and the end of June, and nearly 2 million B-Shares.
Specifically, the 10-Q says that between April 1 and April 10, Berkshire repurchased 226 A-shares at an average price of $305,872.16 per share. Then, between May 28 and May 31, Buffett instructed his brokers to acquire B-Shares. The group bought 1,032,233 B-shares during this short time, paying an average price of $198.90 on the market.
Berkshire continued to buy throughout June. Between June 3 through June 26, the group acquired 55 A-shares at an average price of $311,292.99 and 733,097 B-shares at an average price of $205.16.
Disappointing numbers
The group spent roughly $442 million in aggregate buying back its own shares during the first half of 2019; the amount spent buying A- and B-shares during 2019 is $2.1 billion.
This modest level of repurchase activity is relatively disappointing considering Berkshire has $122 billion of cash on hand.
However, it does reinforce my belief that Buffett believes the intrinsic value of the conglomerate sits somewhere above $312,000 per share. If we assume he wants to buy back stock at a discount of around 10% to intrinsic value, you could argue that a value of $340,000 to $350,000 is acceptable for the A-shares and possibly $230 to $240 is accurate for the B-shares.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:Â
Charlie Munger: Thinking ProbabilisticallyÂ
Howard Marks: Trying to Tilt the Odds in Our FavorÂ
Revisiting Ben Graham's Asset Allocation PolicyÂ
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