Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) jumped more than 5% July 18 on the news Warren Buffett and Charlie Munger have reconsidered their stance on Berkshire Hathaway stock repurchases, something many large investors have been clamoring for it to do.
Up until the surprise announcement, Berkshire Hathaway could only buy back its stock at 1.2 times book value or less than that, a multiple it hasn’t seen since 2012.
Not surprisingly, the response has been tremendously favorable.
Responding to Berkshire Hathaway News
“It’s a somewhat significant change,” said Steven Check, president of Check Capital Management Inc in Costa Mesa, California. “This is a good thing in an environment where Berkshire has a lot of excess cash, nothing to buy, and an underpriced stock.”
Although I’m not a fan of most buybacks because companies tend to pay too much, Berkshire Hathaway does have a cash hoard of $109 billion burning a hole in its pocket.
The company maintains a minimum cash and cash equivalents balance of $20 billion. That will not change under the new arrangement leaving it with as much as $89 billion for future share repurchases.
The Intrinsic Value
What’s unknown is what Munger and Buffett feel is the estimated intrinsic value of its stock.
If they think the Class B shares are worth $300, 50% higher than where they’re currently trading, then the company’s getting a bargain buying back its shares.
JPMorgan analysts, however, peg the intrinsic value of its Class B shares at $236, just 19% higher than where it currently trades or, conversely, at a 16% discount to its intrinsic value.
Interestingly, Berkshire Hathaway’s cash hoard has snowballed since 2010, severely slowing the company’s annual growth in book value per share.
According to Seeking Alpha contributor Ben Comston, Berkshire Hathaway’s annual growth in book value per share since 2010 was 12.2% comprised of a 0.3% cash return per year and a 16.2% non-cash return resulting in a 400 basis point reduction in its annual growth.
Therefore, while share repurchases of Berkshire Hathaway stock above book value will lower its book value per share, the upside is that future growth will accelerate providing a significant tailwind to its share price.
Should You Be Buying?
Currently trading around 1.4 times book, I don’t think there’s any question Berkshire Hathaway stock is worth owning below $200. If you were buying in the $180’s in June, congrats on a well-timed purchase.
Frankly, this announcement does two things: it quiets some of the detractors who’ve suggested that Buffett’s lost his touch and it installs an artificial floor price on its stock because if Buffett and Munger buy in the $190’s, that’s a sure sign it’s worth more.
Of course, like many of Berkshire Hathaway’s moves, you won’t know about it until long after it’s done the share repurchases and the stock price has moved higher.
The Bottom Line on Berkshire Hathaway Stock
While many in the business media have been calling Berkshire Hathaway’s loosening of the share repurchase strings a “game changer” — I wouldn’t go nearly that far — it does stress how far Buffett is willing to go to deliver value for shareholders.
In April, I suggested that Berkshire Hathaway stock was a good buy at $200; it’s gone sideways in the two-and-a-half months since.
With the shackles of its share repurchase plans removed, I’d say if anything, $200 is an even better buy today than it was back in April.
It’s time to get back on the Berkshire Hathaway train.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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