Skip to main content

Berkshire Hathaway Chairman and CEO Warren Buffett is interviewed in New York, Monday, Feb. 22, 2010.

Seth Wenig/AP

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.

Story continues below advertisement

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.

Story continues below advertisement

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.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter