September 27, 2011
THE board of Berkshire Hathaway, in a rare move, approved a plan to buy back the company's stock, an indication of how much chief executive Warren Buffett believes the shares are undervalued.
The authorisation marks the first time since 2000 Mr Buffett has indicated Berkshire's cash pile could best be used to buy back the company's own shares. Such repurchases, common for other companies but nearly unheard-of at Berkshire, give investors who retain the stock a greater share of the company by taking some shares off the market.
Under the authorisation, Mr Buffett can use Berkshire's cash on hand to repurchase an indefinite amount of the company's Class A and Class B shares at prices no higher than a 10 per cent premium over their book value, a measure of assets minus liabilities.
"In the opinion of our board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise," the company said in a statement yesterday. "If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest."
The move comes after Berkshire's stock has fallen 17 per cent this year through Friday, and its price relative to its book value is near its lowest level in decades. When it traded at similar levels in early 2000, Mr Buffett wrote in his annual shareholder letter Berkshire was willing to buy stock directly from Berkshire investors, but the announcement alone was enough to send the stock soaring -- and Berkshire never repurchased a share.
This morning, Berkshire's Class A shares were up 6.3 per cent to $US106,610.99 after Berkshire announced the repurchase program. The shares traded as low as $US98,952 last week, just a fraction above Berkshire's last stated book value per share of $US98,716 as of June 30.
If Berkshire goes ahead with the buybacks this time, it suggests Mr Buffett, known for his savvy deal making, hasn't found investments in recent months that he believes would deliver the same return he can get by buying back Berkshire's own stock.
Berkshire's low stock price potentially limits Mr Buffett's ability to make large acquisitions if they were to require issuing stock to help pay for a deal. Mr Buffett has used Berkshire shares to make acquisitions only sparingly, but the deals that were funded by stock -- including the $US26.5 billion purchase of railroad Burlington Northern Santa Fe last year -- have often been huge additions to Berkshire's stable of operating companies.
Mr Buffett has criticised other executives for using their stock to fund deals when their shares were undervalued. He complained Kraft Foods chief executive Irene Rosenfeld made him feel "poorer" when she used Kraft shares to fund the 2010 acquisition of Cadbury. Berkshire owns Kraft stock.
Analysts and Mr Buffett followers say Berkshire's low price-to-book ratio reflects investor concerns about management succession and the challenge Mr Buffett faces in expanding Berkshire faster than the broader stock market as it becomes ever larger and derives more of its earnings from a slew of non-financial businesses closely tied to the US economy, which remains weak.
Berkshire said in the statement purchases can be made in the open market or in private transactions, and the authorisation can "continue indefinitely". The amount of the repurchases "will depend entirely upon the levels of cash available, the attractiveness of investment and business opportunities either at hand or on the horizon, and the degree of discount from management's estimate of intrinsic value".
Berkshire's cash hoard grew 71 per cent in the 12 months ended June 30 to $US47.9bn. The company said it wouldn't buy back stock if such repurchases would reduce Berkshire's cash pile below $US20bn. The authorisation doesn't obligate Berkshire to buy back stock, the statement said.
Intrinsic value is Mr Buffett's preferred measure for evaluating the worth of Berkshire shares. But he has said evaluating intrinsic value is subjective and the best objective measure is book value, even though it understates Berkshire's true worth.
In 2000, Mr Buffett said companies shouldn't buy back their own stock unless their shareholders "have been supplied all the information they need for estimating" intrinsic value. But he also acknowledged then he had erred at previous low points in the stock's trading history in not buying back shares.
"My appraisal of Berkshire's value was then too conservative or I was too enthused about some alternative use of funds," he told shareholders at the time. In the same letter, he praised companies that repurchased their shares well below book value in the 1970s and chastised those who had paid too much for their own stock more recently.
In addition to share repurchases, companies often use excess capital to pay dividends to shareholders. But while Mr Buffett has said in the past there are very few instances when he would buy back shares, he has been even more dismissive of paying a dividend. Under Mr Buffett, Berkshire hasn't paid one in more than four decades.
At Berkshire's annual meeting in April, Mr Buffett said shareholders shouldn't wish for a reversal of the longstanding dividend policy.
"There will come a time -- who knows how soon -- when we do not think we can lay out $US15bn to $US20bn a year and get something that's immediately worth more than that for our shareholders," Mr Buffett said.
But when that happens, the stock will likely trade down, because it's an admission growth has stalled, Mr Buffett said.
Article by Erik Holm and Mia Lamar From: The Wall Street Journal Additional reporting: Serena Ng