Warren Buffett and the Berkshire Stock Buyback

by Jason Jenkins

Warren Buffett and the Berkshire Stock Buyback

by Jason Jenkins, Investment U Research

Wednesday, September 28, 2011

On Monday morning, Berkshire Hathaway announced the company would pursue an open-ended share repurchase program.

For the first time ever in the company's history, they're initiating a big share buyback.

What's interesting here is that Warren Buffett has a history of souring on the idea of stock buybacks. He reasons that, many times, Wall Street initiates buybacks at the wrong time - usually at the top of cycles, killing the value for shareholders. But in certain cases, he has stated that for certain companies a repurchase can be a good use of capital. Specifically, it's those companies with great business models and a firm financial base that still find their shares completely undervalued in the market.

What Warren Buffett's Berkshire Announcement Says and Doesn't Say

To get what's really going on, you have to look at the specifics.

To paraphrase, Berkshire's Board of Directors has authorized a repurchase of Class A and Class B shares at prices no higher than a 10-percent premium over the then-current book value of shares. Buffett thinks his stock is undervalued. How much? A company press release says, "The underlying businesses of Berkshire are worth considerably more than this amount."

Don't think for one minute that every word of this release wasn't painstakingly thought out. When he uses the word "considerably," he thinks it's selling dirt cheap.

Also, the statement says that Berkshire plans to use cash on hand to fund repurchases, and repurchases won't be made if they would reduce Berkshire's consolidated cash equivalent holdings below $20 billion. Their second-quarter statement says they have about $77 billion in a mixture of cash and short-term bonds. That could be a possible $57 billion used to repurchase shares.

What the press release doesn't include are any real dollar amounts or a time limit. Buffett has the freedom to buy back as much stock as he chooses for as long as he wants - under the parameters that it's still trading at 110 percent of book value.

What was added and what was not leads us to believe the program will put a floor on Berkshire Hathaway stock.

The Affordable Play on Berkshire Hathaway Shares

So what's the take on this announcement by one of the titans of the investment world?

Not only does he believe that his company's stock is a great deal, but I also think it speaks to the rest of the market as Warren Buffett sees it. Since Berkshire usually invests in outside companies, maybe this says that there isn't anything else he sees that's as worthy an investment.

I believe you can infer that his valuations of the overall market haven't brought forth that monstrous opportunity that he's been known to find.

I think it's safe to definitely be long on Berkshire Hathaway and the play is the more affordable Berkshire Hathaway Class B Shares (NYSE: BRK.B). Class B shares rose $5.72, or 8.6 percent, to $72.09 at the close of Monday.

Good investing,

Jason Jenkins

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