Berkshire's Surprise Stock Buyback 'Authorization:' What's Buffett's Strategy?
Shares of Warren Buffett's Berkshire Hathaway are soaring on this morning's announcement the company may repurchase some of the company's Class A and/or Class B shares if they're cheap enough.
Buffett appears to be loosening his definition of "cheap enough" but that doesn't necessarily mean buybacks are underway now, especially since the stock is up.
Both Berkshire's Class A and Class B shares rose in trading on Monday on news of the buyback announcement.
The announcement is a big surprise, in part because it does not require Berkshire's stock price to be below its "intrinsic" value.
Instead, today's news release says Berkshire's board has authorized repurchases "at prices no higher than a 10% premium over the then-current book value of the shares."
In his letter to shareholders earlier this year, Buffett called book value an "understated proxy for intrinsic value." That is, book value would generally be below intrinsic value.
But back in May of 2009, he told shareholders Berkshire's stock price would have to be "demonstrably below" a conservative estimate of the company's intrinsic value for a buyback to be considered. He was setting a high bar, because he generally prefers to use cash for acquisitions or investments.
And just under seven months ago, Buffett noted another obstacle to using a buyback to boost the stock price. During his annual Ask Warren appearance on CNBC's Squawk Box, Buffett recalled announcing a Berkshire buyback "some years ago" when the price was in the low $40,000s:
"And by announcing, it was self-defeating. I mean, the stock went up. And there are times when I've— would have liked to have bought a significant percentage of Berkshire in the market because I thought it was— it would have been— increased the per-share value of the remaining shares.
If I'm going to buy you out in order to benefit Joe and me, I want to tell you first that I think I'm buying you out cheap. Now, if you still want to sell to me, you know, that's fine and you've been warned and— but the very act of me telling you that, particularly in a stock like Berkshire, is probably going to make the whole exercise self-defeating. It certainly did a couple of years ago. So it isn't much of a tool for us. I think it's a great thing to do if your stock is selling well below intrinsic value."
We're seeing the "self-defeating" aspect of a buyback with today's big gains for Berkshire's shares.
Remember, however, that today's news release points out that the "repurchase program does not obligate Berkshire to repurchase any dollar amount or number" of the company's shares and there's no time limit:
"The repurchase program is expected to continue indefinitely and the amount of purchases 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."
It's an "authorization," not a mandate. Berkshire isn't necessarily buying back shares now, and may never repurchase any at all.
By saying it might, however, Berkshire could be trying to suggest a "floor" for the company's shares.
As of the end of June, Berkshire put its book value at $98,716 per Class A share.
At that level, (it has probably changed since then, but Berkshire only publicly updates its book value for the end of each quarter), the company might repurchase shares when the stock is below $108,588 a share, a level is it rapidly approaching with today's rally.
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