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
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.