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Buffett Leans Into New Way to Use Cash With Buybacks Surging

Katherine Chiglinsky
·4 min read

(Bloomberg) -- Warren Buffett has gone from a stock-buyback skeptic to one of the world’s biggest repurchasers as his own firm becomes his favorite investment in the pandemic.

The famed investor’s Berkshire Hathaway Inc. spent the third quarter buying back about $9 billion of its own stock, more than it had repurchased in any full year in its history. The buying spree takes the total repurchases in the first nine months of 2020 to $16 billion, and the most recent pace would be the biggest of any U.S. company except Apple Inc., which happens to be Buffett’s largest investment.

Buffett, 90, has been struggling for years to find attractive deals that would deploy his cash pile into higher-returning assets to help supercharge the growth of his conglomerate. In recent years, he’s backed off his long-held aversion to share buybacks. Now, repurchases led his capital-deployment maneuvers in the quarter, alongside a roughly $6 billion investment in Japanese trading houses, a bet on Snowflake Inc. and a deal for natural gas assets.

“You start to talk about a pretty significant amount of cash that’s been put to work,” Jim Shanahan, an analyst at Edward Jones, said in a phone interview. Big multi-billion investments “are difficult to come by and in the absence of that, they’re finding ways to put cash to work, I think in a meaningful amount.”

The buybacks allowed Buffett to chip away at Berkshire’s cash pile in the third quarter, with that war chest dropping slightly to $145.7 billion, the company said Saturday. The funds, which still give him plenty of capital to deploy into acquisitions, stock purchases or buybacks, have recently been accumulating faster than Buffett can put them to work in higher-returning assets.

The heightened buybacks could indicate more optimism in the conglomerate’s prospects, just months after Buffett told Berkshire shareholders at the annual meeting in May that repurchasing shares wasn’t more compelling than when the stock was much higher before the pandemic.

Berkshire stock climbed 20% in the third quarter, surpassing the 8.5% gain in the S&P 500 Index during the same period. The company accelerated its repurchases even as the shares climbed through the quarter. Still, Berkshire stock is overall cheaper than it was at the end of last year, with Class A shares down 7.6% through Friday’s close.

The buybacks likely continued into October. Saturday’s filing shows that Berkshire’s share count decreased even through Oct. 26, indicating Berkshire spent at least $2.3 billion repurchasing stock during those weeks.

“The forceful share buybacks suggest that at least one lever that can be pulled more forcefully as the price lingers is the one that he’s doing,” Thomas Russo, who oversees more than $9 billion including Berkshire shares at Gardner Russo & Gardner LLC, said in a phone interview. “I’m delighted to see that kind of commitment.”

Operating Profit

The conglomerate’s businesses have bounced back slightly from the depths of the slump in the second quarter. Profit at the railroad, while still down from a year earlier, was higher than the three months ended June 30, and Berkshire’s utilities posted its highest quarterly profit in more than a decade. Still, operating profit dropped 32%, hurt by the insurance unit’s first underwriting loss since the end of 2019.

Buffett’s businessses have been battered by the pandemic this year. Aerospace parts-maker Precision Castparts, which was hit by a $10 billion charge in the second quarter, reported an 80% drop in pretax earnings in the three months that ended Sept. 30. Retailers such as See’s Candies and Oriental Trading have experienced “significant declines” in earnings this year.

Berkshire’s board announced a policy change in July 2018 that allowed Buffett and his business partner, Charles Munger, to buy back stock when the price is below whatever they consider Berkshire’s intrinsic value. Previously, they couldn’t make repurchases if the price was more than 20% above current book value.

“This concept of reallocating capital to shareholders was just not necessarily a tenet of Berkshire’s operating policies,” CFRA Research analyst Cathy Seifert said in a phone interview. “In this environment, it’s getting harder and harder for them to justify holding on to billions and billions of dollars in Treasury securities.”

Buffett’s appetite for equities wasn’t limited to his own shares. After selling the most stocks on a net basis in more than a decade during the second quarter, Berkshire reversed course in the following months, purchasing $4.79 billion of stocks on a net basis during the third quarter.

The company’s investments delivered almost $25 billion in investment gains amid the market rally, helping net income almost double despite the drop in operating profit.

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