Berk­shire’s stock has slumped. Will War­ren Buf­fett buy back shares?

The stock’s low price puts it closer to a thresh­old War­ren Buf­fett has been “lay­ing the ground­work” for years

Bloomberg Businessweek (Asia) - - CONTENTS - −Noah Buha­yar

Shares in Berk­shire Hath­away, the con­glom­er­ate headed by War­ren Buf­fett, have slumped 14 per­cent over the past 12 months, com­pared with a 5 per­cent drop for the Stan­dard & Poor’s 500stock in­dex. By it­self, one weak year doesn’t mean much—even Buf­fett has had his dry spells. (In 1999, Berk­shire trailed the dot-com-smit­ten mar­ket by 41 per­cent­age points.) Berk­shire’s cur­rent low price, how­ever, raises an in­ter­est­ing new pos­si­bil­ity for in­vestors: The stock is hov­er­ing near the point where Buf­fett has sig­naled he’d be will­ing to buy back shares.

Buf­fett, who has run Berk­shire for more than 50 years, has largely avoided any move to re­turn cash to share­hold­ers. In­stead of pay­ing div­i­dends, he’s rein­vested prof­its to trans­form a strug­gling tex­tile maker into a sprawl­ing col­lec­tion of com­pa­nies rang­ing from in­sur­ers to a rail­road, plus a port­fo­lio of pub­licly traded stocks worth $110 bil­lion. A big ex­cep­tion came in 2012, when Buf­fett’s com­pany spent more than $1 bil­lion on buy­backs, largely from the es­tate of a long­time share­holder who wasn’t iden­ti­fied. At that time, the com­pany said it could buy shares for no more than a 20 per­cent pre­mium to its book value, a mea­sure of as­sets mi­nus li­a­bil­i­ties.

Berk­shire’s book value prob­a­bly climbed to $154,292 per share at the end of 2015, ac­cord­ing to an es­ti­mate from Keefe Bruyette & Woods. Class A shares in the com­pany changed hands for $194,000 on Jan. 12. That puts it at about a 25 per­cent pre­mium to book.

Buf­fett is an icon of value-minded stock­pick­ers, so any move to buy shares would likely be greeted as a sign the shares are a bar­gain. Who’d want to sell when Buf­fett is buy­ing? A buy­back would help “mop up shares that are in awk­ward hands,” ex­plains Tom Russo, who over­sees hold­ings that in­clude Berk­shire shares at Gard­ner Russo & Gard­ner. Th­ese might in­clude the es­tate of a long­time share­holder need­ing to set­tle a tax bill or a char­ity that wants to un­load ap­pre­ci­ated shares to fund its work. (A dol­lar in­vested in Berk­shire in 1965 has grown to $15,600, vs. less than $110 for the

S&P.) A buy­back could be a

way for those own­ers to take some money off the ta­ble with­out hav­ing an im­pact on the mar­ket price.

The ex­pec­ta­tion of a buy­back might also help set a floor un­der the stock price—fewer shares means each one is more valu­able. Still, there’s a ques­tion of how much cash Buf­fett would be pre­pared to spend. S&P is re­view­ing whether to cut Berk­shire’s credit rat­ing, ask­ing how the com­pany will pay for its planned pur­chase of aero­space equip­ment maker Pre­ci­sion Cast­parts. Buf­fett has said he sold some stocks in 2015 partly to help pay for the $32 bil­lion ac­qui­si­tion. Even if Berk­shire stock falls fur­ther, Buf­fett might pre­fer to use any avail­able cash to make other deals.

The grad­ual move to buy­backs is also a re­minder that Berk­shire’s growth is inevitably slow­ing. In a let­ter to in­vestors last year, Buf­fett said that a decade or two in the fu­ture, the com­pany’s earn­ings will be so great that it won’t be pos­si­ble to in­tel­li­gently de­ploy all its funds back into the busi­ness. “If Berk­shire shares are sell­ing below in­trin­sic busi­ness value,” he wrote, “mas­sive re­pur­chases will al­most cer­tainly be the best choice.” In­trin­sic value is a sub­jec­tive es­ti­mate of the cash that can be taken out of a busi­ness in its life­time; Buf­fett has called book value a de­cent, though con­ser­va­tive, standin for that gauge.

Reg­u­larly buy­ing back stock or pay­ing div­i­dends would “sig­nal the end of an era” at Berk­shire, says David Rolfe, chief in­vest­ment of­fi­cer for Wedge­wood Part­ners, a St. Louis­based money man­ager whose in­vest­ments in­clude Berk­shire stock. Buf­fett and Vice Chair­man Charles Munger “have been lay­ing the ground­work” for that event for years, Rolfe says. “Back in the day, they had a ton of ideas and not enough money. Th­ese days, they have not enough ideas and a ton of money.”

Rolfe adds that this is a high­class dilemma: “Ev­ery For­tune 500 com­pany would love to have this prob­lem.”

The bot­tom line Berk­shire Hath­away stock is get­ting near the price where Buf­fett would be will­ing to take it off in­vestors’ hands.

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