Berkshire revision a boon for Buffett

Warren Buffett might finally have found the bargain he was looking for in this era of inflated asset prices, and in his Omaha backyard too. Berkshire Hathaway has decided to adjust its share repurchase criteria, giving Buffett and his sidekick, Charlie Munger, the flexibility to repurchase equity when they believe Berkshire shares are below their view of intrinsic value, “conservatively determined”.

Buffett had famously set a mechanical bar for buybacks in the past. Berkshire was only interested in buying its shares if they traded below 120% of book value. The revision is an intriguing signal that Buffett believes acquisition targets are simply too expensive for his tastes. The more precise conclusion is, however, that Berkshire is just so large that it has the firepower for both blockbuster deals and capital return.

Berkshire’s price-to-book ratio is currently about 1.4 times. There is no precise threshold where a stock must be above intrinsic value. However, Buffett has historically set that level between 10% and 20%. Its repurchase activity has been mild. It last did so in 2012 and then only about $1bn worth (Berkshire’s market capitalisation is now nearly $500bn). However, Buffett has been an enthusiastic supporter of buy-backs generally, pushing back against social critiques, as a way for companies to create value for long-term shareholders. For example, he has supported heavy share repurchases at Bank of America, where he is a large shareholder.

Berkshire has now accumulated more than $100bn of cash. That kind of war chest is more than enough for any mega acquisition or partnership deal, like it has done with 3G Capital in the past. Eventually, valuations will recede and it can put some of that to work. Some portion, in the meantime, can go to a buy-back programme. Buffett seems to think Berkshire’s fundamental value has disconnected from its book value. Some bigger strategic move might be cooking beyond just a buy-back. London, July 19