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Here's Why Berkshire Hathaway Stock Is Soaring Today

Matthew Frankel, The Motley Fool

What happened

Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) board of directors made a major change to the company's buyback policy.

Shares can now be repurchased whenever CEO Warren Buffett and Vice Chairman Charlie Munger agree they are trading at a discount to their intrinsic value. Previously, the board's buyback rule stated that the company could only buy back shares when they were trading for less than 1.2 times their book value.

Warren Buffett smiling.

Image source: The Motley Fool.

So what

Berkshire is sitting on a $108 billion stockpile of cash and equivalents, and this gives Buffett a new way to finally start putting that money to work.

Buffett likes to have at least $20 billion in cash at all times, and the new buyback rule prohibits any buybacks that would result in the cash position falling below that level. Even so, this still leaves over $88 billion that is sitting in the bank (or in Treasuries) earning next to nothing that Buffett, as well as Berkshire's shareholders, want to put to work in a more constructive manner.

Additionally, by making an effort to allow for more share buybacks, Buffett and Berkshire's board are effectively telling investors that the company's stock could be the best use of investor capital in the current environment.

Now what

In reference to the former 1.2 times book value buyback threshold, Buffett has said several times that such a valuation represents a substantial discount to the shares' intrinsic value. So, while the methodology Buffett and Munger will use to value Berkshire's stock is a mystery, it's fair to say that this move lifts the threshold valuation significantly.

To sum it up, Berkshire has had a cash problem for several years, and this is the first true sign that the problem could finally be addressed.

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Matthew Frankel owns shares of Berkshire Hathaway (B shares). The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.