The board of directors of holding company Berkshire Hathaway (BRKB) announced that it has authorized a share repurchase program. According to the board, Berkshire's underlying businesses are worth more than the current stock price suggests. Repurchases will be completed at management's discretion, and the plan is to use cash on hand to fund the buybacks. As of June 30, 2011, Berkshire possessed more than $47 billion in cash. The announcement was greeted warmly by investors, and Berkshire stock rose more than 5% upon the news, to about $70 a share.
We are quite surprised by this move. Warren Buffett has controled Berkshire for more than 40 years, and up until now, has never instituted a share repurchase plan. Moreover, on several occasions, he has stated that he typically disagrees with share buybacks, preferring to utilize excess capital to bolster Berkshire's vast equity portfolio and/or complete acquisitions. In fact, the company just recently finalized the purchase of Lubrizol, a specialty chemicals producer, for approximately $9.7 billion. In our view, the buyback announcement signals that additional attractive acquisitions are proving hard to come by. Furthermore, due to Berkshire's size and vast profitability, there are few purchases that could be considered “game changers”. For instance, in 2010, Lubrizol achieved net profit of $680 million, while Berkshire posted earnings of almost $13 billion.
All told, the buybacks should help advance annual share earnings, but we think the announcement may suggest that the pace of Berkshire's acquisition activities, and overall growth, will slow. That said, we still like this stock as a long-term holding. Berkshire possesses a number of profitable subsidiaries, which should lead to healthy annual share-net gains to the 2014-2016 period. In addition, due to the recent stock market swoon, Berkshire shares are trading well below their 52-week high, and more than 30% off their all-time peak, which was reached in 2007.
About the Company: Berkshire Hathaway is based in Omaha, Nebraska, and run by legendary investor Warren Buffett and his partner Charles Munger. The holding company owns dozens of subsidiaries, and operations are divided into three divisions: Insurance and Other; Railroad, Utilities, and Energy; Finance and Financial Products. Well known subsidiaries include GEICO, Burlington Northern Santa Fe, Dairy Queen, and Netjets. In also owns and controls a large equity portfolio. Major holdings include Coca-Cola, American Express, Wal-Mart, and Johnson & Johnson.
At the time of this article's writing, the author did not have positions in any companies mentioned.