Warren Buffett has told investors where he sees terrific value in the stock market right now: His own stock.
And investors seem to agree, driving up Berkshire Hathaway Inc.'s share price by 2.6 per cent on Wednesday after the conglomerate controlled by Mr. Buffett said that it had bought back shares worth $1.2-billion (U.S.).
The buyback doesn't come as a big surprise: Mr. Buffett had said as far back as September 2011 that Berkshire Hathaway planned to purchase its own shares, despite what had been a distaste for the practice.
The legendary investor has long believed that buybacks, along with dividends, did not build net worth – and he could have pointed to any number of companies that showed atrocious timing in such purchases, in that they bought high.
In the case of Berkshire Hathaway, though, Mr. Buffett had said that the shares were undervalued – and therefore ripe for buybacks – when they traded at 110 per cent of book value, or 10 per cent above what the company would be worth if it were liquidated.
With Wednesday's announcement, Mr. Buffett adjusted that figure, saying that the threshold for buybacks had been raised to 120 per cent of book value. That means he believes Berkshire Hathaway is a steal-of-a-deal even at a slightly higher valuation.
Given how influential Mr. Buffett is, there is little wonder that the announcement lifted the share price. However, the buybacks come with a downside, too.
For one, the action suggests that Mr. Buffett might be running low on investment ideas. He has said in the past that the company would only pay a dividend when he couldn't find better uses for Berkshire Hathaway's considerable cash hoard.
Buybacks are widely seen as being akin to dividends, in that they are another way of returning cash to shareholders. The buybacks, then, might be an indication that Mr. Buffett isn't exactly brimming with excitement over today's stock market.
For another, the share buyback wasn't handled in the typical way, with a company buying back its own shares on the open market. Berkshire Hathaway bought 9,200 shares, at $131,000 each, from the estate of an unnamed long-time shareholder.
According to Reuters blogger Felix Salmon, that sounds like code for a friend of Mr. Buffett's – and the timing, coming less than a month before capital gains taxes are likely to go up and just a day after Mr. Buffett said he supported higher estate taxes on the wealthy, also looks odd.
It suggests that the low valuation of the stock might not be the only consideration at work here.
It is rarely a good idea to copy the moves of famous institutional investors, including Warren Buffett. Following him into Berkshire Hathaway, solely because of this buyback announcement, is not an exception.