Berkshire Hathaway Inc. (BRK.A”>BRK.A) (BRK.B”>BRK.B) has announced its first share buyback plan to utilize its reserves for the purpose.
Chairman Warren Buffett, also known as the “Oracle of Omaha,” said that he would pay a 10% premium above book value to buy back shares, but he also capped the upside by saying that he would jettison the idea if the share price bounces back to reflect the actual net worth or the cash balance falls below $20 billion. Berkshire had $47.9 billion in its kitty as of the end of second quarter 2011.
Berkshire has two classes of shares – Class A that trades at around $100,000 and gives owners voting rights, and the more actively traded Class B shares, which were split into smaller parts at the time of the acquisition of the railroad company Burlington Northern Santa Fe Corp.
For over four decades Buffett has refused the idea of spending cash for share buybacks or dividend payment, instead satisfying his urge to use the funds for acquiring solid businesses or investing in equities of strong companies. In his most recent annual report also, he spelt out his desire to make major acquisitions.
So what has prompted Buffett to make such an unprecedented move?
This shift in Buffett’s attitude probably comes from more reasons than one. Investors have been complaining that the stock has been languishing below book value of late. Buying back 15% of shareholder’s equity will have the effect of raising the book value and intrinsic value of the residual shares.
Or it may be Buffett does not want to lose this opportunity, after having missed buying back shares in 2000 and earlier, when the stock was trading at very low prices. Buffett in his letter in 2000 had praised companies that bought back discounted stock thereby, restoring shareholder’s wealth.
Yet another stronger reason could be the current uncertain macroeconomic condition. Given the slowdown in the global and U.S. economy and declining equity markets, analysts predict equity prices going down further by approximately fifteen to twenty percentage points. This would lead to discounted valuations thereby, presenting Buffett an opportunity to buy back Berkshire stock.
Earlier Surprises
Buffett threw yet another surprise when he first spun-off Class B shares. After rejecting calls to split the stock for years, he finally did so in the fall of 2009, stating that it would facilitate the acquisition of Burlington Northern railroad. However, we think Buffett saw this as an opportunity to secure membership to the exclusive S&P 500.
The appointment of Tedd Combs last year also made major headlines and it was rumored that he would take up one of the lead positions at Berkshire, probably that of an Investment Manager which would be created upon Buffett’s resignation. Earlier during the month, an additional investment manager Ted Weschler was hired.
Buffett is quietly working on his succession plan. Though presently he is the sole CEO and Chairman of Berkshire Hathaway and takes all the investment decisions. He is reportedly considering splitting his job into three different roles — CEO, Chairman and Investment Manager.
Each and every move by Buffett is geared towards streamlining operations at Berkshire after he steps down. Berkshire has grown into a conglomerate and is a mature company, which should likely have different investment needs than it had earlier. Utilizing the vast amount of cash the company is generating is a mammoth task.
Moreover, given Buffett’s investment acumen of utilizing cash it is statistically unlikely for any new management of this conglomerate to be able to continue Buffet’s long-term market outperformance.
What do we expect next from Buffett – a dividend?
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report
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