Berkshire Hathaway repurchase program

In a September 26, 2011, news release, Berkshire Hathaway announced, to the surprise of many, a program to repurchase Class A and Class B shares of Berkshire.

Here is an insight into Warren Buffett’s thinking about share repurchase. In his annual letter (March 1, 2000) to Berkshire Hathaway shareholders for Year 1999, he said, among other things: “Please be clear about one point: We will never make purchases with the intention of stemming a decline in Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the Company’s money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our stock’s intrinsic value.”

Mr Buffett also said: “There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated.”

In the letter for Year 1999, Mr Buffett also said: “You should be aware that, at certain times in the past, I have erred in not making repurchases. My approval of Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds. We have therefore missed some opportunities — though Berkshire’s trading volume at these points was too light for us to have done much buying, which means that the gain in our per-share value would have been minimal.”

Bershire Hathaway’s September 26, 2011′s letter on the repurchase program also gave reasons for the move. The letter said: “Our Board of Directors has authorized Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest.”

In the letter, Berkshire stressed the importance of financial strength, saying: “Berkshire plans to use cash on hand to fund repurchases, and repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. ”

The letter went on to say: “Berkshire may repurchase shares in open market purchases or through privately negotiated transactions, at management’s discretion. The repurchase program is expected to continue indefinitely and the amount of purchases will depend entirely upon the levels of cash available, the attractiveness of investment and business opportunities either at hand or on the horizon, and the degree of discount from management’s estimate of intrinsic value. The repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

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