Skip to main content

Investment Ideas Buffett nears buyback threshold as Berkshire shares extend slump

Berkshire Hathaway Inc.'s stock slump over the past year has moved shares closer to the point where Chairman Warren Buffett says they're a steal.

Book value, a measure of assets minus liabilities, probably climbed to $154,292 (U.S.) per share at the end of 2015, according to an estimate from Keefe Bruyette & Woods. Class A shares changed hands for $196,260 at 11:25 a.m. in New York Wednesday, or just 27 per cent higher than the estimate. The company has said it'll buy back stock for a premium of no more than 20 per cent.

Mr. Buffett, 85, largely avoided share repurchases as he built Berkshire from a struggling textile maker into a sprawling conglomerate through investments and acquisitions. The board added buybacks to his toolkit in 2011. The policy helped set a floor under the stock and provided a pathway to retire some shares held by investors seeking to exit large holdings that they've held for decades.

Story continues below advertisement

A buyback would be "terrific," said Tom Russo, who oversees about $10-billion including Berkshire shares at Gardner Russo & Gardner. It would help "mop up shares that are in awkward hands."

While the stock has soared during Mr. Buffett's half-century running the company - making the chairman and many of his early backers rich - last year was a struggle. The shares fell 12 per cent in 2015 and dropped another 0.8 per cent this year.

Three of Buffett's big stock picks - Wal-Mart Stores Inc., American Express Co. and International Business Machines Corp. - lagged behind the Standard & Poor's 500 Index last year. And operating earnings were flat through the first nine months of 2015. The company hasn't reported fourth-quarter results.

Berkshire doesn't pay a dividend, which puts investors under pressure to sell stock if they need income from their holdings. The last time Mr. Buffett announced a repurchase was in late 2012, when his company spent more than $1-billion on buybacks, largely from the estate of a long-time shareholder who wasn't identified.

Still, there may be limits to how much cash Mr. Buffett is prepared to spend, even if the stock falls. S&P is reviewing whether to cut Berkshire's credit rating amid an examination of how the company will pay for its planned purchase of aerospace-equipment maker Precision Castparts Corp. Mr. Buffett has said that he sold some stocks in 2015 partly to help pay for the $32-billion deal.

In a letter to investors last year, Mr. Buffett set the stage for much more-extensive buybacks. A decade or two in the future, he wrote, the company's earnings will be so great that it won't be possible to intelligently deploy all the funds back into the business.

Directors of the company will then have to decide whether to use cash for repurchases or dividends, based on their view of the firm's intrinsic value, he wrote. Intrinsic value is a subjective measure that accounts for the amount of cash that can be taken out of a business in its lifetime. Mr. Buffett has said that book value is a decent, though understated, stand-in for the gauge.

Story continues below advertisement

"If Berkshire shares are selling below intrinsic business value," Mr. Buffett wrote, "massive repurchases will almost certainly be the best choice."

Report an error
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