Berkshire Hathaway Will Benefit Greatly From Its Large Share Buybacks

Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) reported its Q3 earnings on Nov. 3, where it made an unusual admission. Its buyback of a large number of its own shares during the quarter will greatly benefit Berkshire Hathaway stock and its remaining shareholders.

Source: Kent Sievers /

For example, the company said that during the quarter it bought back $9 billion worth of shares. In its prior quarter, the total value of buybacks was only $5.1 billion.

Buybacks, Repurchases and More

Therefore, this means share repurchases totaled $15.7 billion for 2020 year-to-date. This is significantly higher than the prior two years combined.

For example, during all of 2019, the company repurchased just $5 billion. And in 2018 its share buybacks totaled $1.3 billion.

However, Warren Buffett, chairman and CEO, clearly forewarned investors that he was likely to begin major share repurchases. In the 2018 annual report, published in Feb. 2019, he talked at length about buybacks.

First, on page 3 of the shareholder letter, he said that over time Berkshire was likely to be a “significant” repurchaser of its shares.

One reason for this is because Buffett intends for the purchases to be below the company’s “intrinsic value.” However, this may be above Berkshire Hathaway’s book value. He has no problem with this apparent contradiction. Here is why:

“The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality.”

Second, later in the same 2018 annual report, he pointed out that there are benefits to both existing and selling shareholders of Berkshire Hathaway stock. Sellers benefit from having an extra buyer in the market, i.e., an increase in demand. Existing shareholders will see an increase in intrinsic value.

Timing of the Berkshire Hathaway Stock Buybacks

If you look at a chart on Berkshire Hathaway stock, it has been more or less flat for the past two years. Moreover, the company has had a significant number of chances earlier this year to increase its buybacks at much lower prices.

But Buffett didn’t react until Q3 when it was clear that things were on the mend. He could have also done more buybacks in 2018 and 2019.

But I think he is worried about the stock price performance of Berkshire Hathaway. Even though major holdings in its marketable securities portfolio like Apple (NASDAQ:AAPL) have soared, Berkshire Hathaway stock is down about 6% as of Nov. 6. In addition, year-to-date, it is down 7.8%.

In fact, I wrote about this severe underperformance in a recent article on Berkshire Hathaway. I show that the stock has seriously underperformed the market for the past five and 10 years.

Dividends and Buybacks

I also wrote that Berkshire Hathaway might consider paying a dividend or spinning off some underperforming divisions. In fact, if this buyback maneuver does not work, Buffett may have to consider paying a dividend.

That is because one of the major benefits of share buybacks is that it allows companies to increase their dividends per share without any dollar value increase.

I have written numerous articles about this benefit. These articles include this one where I explain it in more detail.

In addition, you might find my articles interesting on Microsoft (NASDAQ:MSFT) and its buyback program, as well as Starbucks (NASDAQ:SBUX) accelerated buyback program, IBM’s (NYSE:IBM), at American Express (NYSE:AXP), and at Intel Corp (NASDAQ:INTC).

What To Do With Berkshire Hathaway Stock

Andrew Bary of Barron’s financial magazine says that Berkshire Hathaway shareholders should cheer from its increasing bets on itself.

For one, there is no execution risk, as opposed to if Berkshire Hathaway acquires private companies. Second, it helps put to use its huge pile of cash, which now is over $161 billion, including fixed income securities.

Third, according to James Shanahan, an analyst at Edward Jones, Berkshire Hathaway stock trades at just 1.2 times book value. He believes that is a “meaningful” discount to its intrinsic book value.

So there it is again. Another declaration that Berkshire Hathaway has a higher intrinsic value, but no value is conveniently put on that number.

I’m sorry, but please forgive the cynic in me. I think the more realistic reason why Buffett is buying back shares is because of the underperformance of Berkshire Hathaway stock. If he were truly serious about curing its price-to-intrinsic value problem he could take more direct steps such as spin-offs, carve-outs, dividends, and even sales of deadwood assets.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

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