Warren Buffett on retained earnings and repurchase program
Berkshire Hathaway’s belief in retaining earnings as a way to strengthen its business can be seen in this excerpt from Warren Buffett’s letter to shareholders (February 26, 2011) for Year 2010:
“Furthermore, not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years. Instead, we have retained all of our earnings to strengthen our business, a reinforcement now running about $1 billion per month. Our net worth has thus increased from $48 million to $157 billion during those four decades and our intrinsic value has grown far more. No other American corporation has come close to building up its financial strength in this unrelenting way.”
Berkshire, however, decided on a repurchase program on 26 September 2011, releasing this news release titled “Berkshire Hathaway Authorizes Repurchase Program”:
“Omaha, NE (NYSE: BRK.A; BRK.B) — 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.
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. 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.”
The surprise repurchase program prompted speculation on why Berkshire Hathaway embarked on such a move, with one report saying: “Warren Buffett is sending a clear signal that he believes Berkshire Hathaway’s stock is undervalued by announcing a plan to repurchase stock for the first time since taking over the firm in 1965.”
A Reuters report said: “One long-time Buffett investor said the ‘Oracle of Omaha’ was effectively buying two things cheaply – Berkshire as an operating company for a broad set of industrial and consumer businesses, and Berkshire as a portfolio of financial and other stocks that have been heavily sold of late.”
The Reuters report also said: “…some long-time investors have said Berkshire shares were lately at their cheapest in a generation, and even analysts who were cautious on the stock said it was attractively priced.”
Where does Berkshire Hathaway keeps its cash? Warren Buffett’s Letter To Stakeholders (February 26, 2011) for Year 2010 has an answer: “We keep our cash largely in U.S. Treasury bills and avoid other short-term securities yielding a few more basis points, a policy we adhered to long before the frailties of commercial paper and money market funds became apparent in September 2008. We agree with investment writer Ray DeVoe’s observation, “More money has been lost reaching for yield than at the point of a gun.” At Berkshire, we don’t rely on bank lines, and we don’t enter into contracts that could require postings of collateral except for amounts that are tiny in relation to our liquid assets.””
The letter went on to say: “By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of liquidity, though, lets us sleep well. Moreover, during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival. That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.”
Recommended reading:
(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition
