After repurchasing exactly zero shares through the first nine months of the year, Berkshire made a big splash Wednesday, announcing it repurchased $1.2 billion worth of Class A shares from the estate of a long-time shareholder.
Buffett famously never overpays for anything, and that goes double for Berkshire’s own stock. So it is interesting to note that the company raised its own threshold for what it will pay to buy back shares. Berkshire will now fork over up to 120% of book value — up from a prior limit of 110% of book value — when it considers repurchasing shares.
What that boils down to is that Berkshire is willing to pay no more than $134,062 for its Class A shares. Naturally, the stock popped more than 2% on the news to $133,976.
If you want to sell Warren your Berkshire A’s, you better act quick.
Of course, Berkshire didn’t even pay that much of a premium in its $1.2 billion repurchase. It bought back 9,200 shares at just $131,000 — only a slight premium to the most recent closing price of $130,831.
We at InvestorPlace generally prefer dividends to share repurchases because companies are so boneheaded about what they pay for their own stock. Contributor Will Ashworth recently said about the rush to buybacks: “The unfortunate part of this herd-like mentality is that CFOs are terrible at estimating the intrinsic value of their share price and thus tend to overpay.”
Happily, Buffett is the exception to the rule. When Berkshire buys back shares, it does it right. (The company, of course, doesn’t do dividends; Buffett is better at investing that money than you are, after all.)
And, importantly, the Oracle of Omaha always makes it quite clear that he will never pay a premium to Berkshire’s intrinsic value when he buys back stock. To his credit (and fiduciary duty), Buffett always warns shareholders in Berkshire that if they sell shares to him in a stock buyback program … well, they’re going to be on the losing end of a trade.
Here’s how Buffett puts it in the annual report:
“We like making money for continuing shareholders, and there is no surer way to do that than by buying an asset — our own stock — that we know to be worth at least x for less than that — for 0.9x, 0.8x or even lower. (As one of our directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)”
Indeed, he has been hammering this point for a long time. Back during the dot-com bubble, companies were sopping up their own stock. Here’s what Buffett said about that back in 1999:
“Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason, to pump up or support the stock price. The shareholder who chooses to sell today, of course, is benefited by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around.”
With Berkshire’s share price bumping up so close to that 120% of book value level, don’t expect to see Buffett go on a buyback binge. He just won’t overpay for shares.
Never has, never will.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.