Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) is not your traditional company. Not by a long shot. The conglomerate run by Warren Buffett and team has two classes of stock and many investors consider it as so diversified that its returns should now simply mirror the stock market or other simple index-performance metrics. That said, this is Buffett’s company and he wants to grow the book value per share for shareholders faster than the overall market.
One issue that can influence any per share calculations (book value, earnings, and so on) is stock buybacks. It turns out that Berkshire Hathaway does have an allowance and formula for repurchasing shares of its own common stock. Up until now, Buffett and his team could repurchase Berkshire Hathaway shares at a price that would not exceed a 20% premium over the current book value of those shares at the time the buybacks occur.
That was then. Now Berkshire Hathaway is creating a new rule for when Warren Buffett and other members inside of the company can repurchase shares of their common stock. Buffett and Charlie Munger have just handed themselves an open checkbook that can be used for buying back stock any time and arguably for any price or reason. A press release on Tuesday evening said:
The Board of Directors of Berkshire Hathaway Inc. has today authorized an amendment to Berkshire’s share repurchase program. The earlier share repurchase program provided that the price paid for repurchases would not exceed a 20% premium over the then-current book value of such shares. Under the amendment adopted by the Board of Directors, share repurchases can be made at any time that both Warren Buffett, Berkshire’s Chairman and CEO, and Charlie Munger, a Berkshire Vice Chairman, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.
Let’s think about what this might mean when you break it down. The amendment includes “at any time” and “believe the repurchase price is below Berkshire’s intrinsic value” and “conservatively determined.” The long and short of the matter is that Buffett and Munger only have to publicly say they thought their stock was cheap at any given time.
The good news here for Berkshire Hathaway shareholders is that there are still at least some restrictions placed upon the company that would keep the Buffett-Munger team from going overboard on share repurchases. The company cannot drop under that $20 billion in perceived liquidity by buying back too much stock. The release said:
The current policy whereby share repurchases will not be made if they would reduce the value of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $20 billion will continue. Berkshire will not initiate any share repurchases under the amended program until it publicly releases its second quarter earnings, currently scheduled after the close of the markets on Friday, August 3, 2018.
Berkshire Hathaway ended 2017 with more than $100 billion between its cash and short-term investments, and it had over $200 billion in long-term investments. Its total assets at year-end tallied up to $702 billion, just over twice as much as its $350 billion in total liabilities. Berkshire Hathaway’s last seen market capitalization, the value at which the equity markets value the company on any given day, was last seen at $472 billion.
Some investors will cheer this news because it will simplify the repurchase criteria to “any day the stock can be justified as cheap, as long as there is $20 billion in the bank.” Other investors will argue that this opens up the company to corporate governance issues wherein management (remember, neither Buffett nor Munger are likely to live forever) has too little control over when it should be buying back stock versus making acquisitions that can grow the company as a whole over time.
It might be easy to see at least some of the obvious potential conflicts that could arise from this corporate governance change. When you throw in Buffett, it’s easy to assume he would win any argument over what “cheap or value” is on any given day. Then again, Buffett has admitted many times he is not immune from making mistakes.
Berkshire Hathaway’s A-shares closed down $500.00 at $288,500.00 and the B-shares closed down $1.59 at $190.41 on Tuesday. As of Tuesday’s closing bell, the shares were down roughly 4% so far in 2018.
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