Such is the cult of attention around Berkshire Hathaway (NYSE:BRK.A) and its CEO Warren Buffett that he probably cannot have dinner without a dozen financial columnists debating the merits of him choosing beef, pork or chicken. With Monday's announcement that the company has authorized a share buyback that could be worth close to $30 billion or more, there is rampant second-guessing about the decision and numerous attempts to divine some further meaning in the move.
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The Buyback to Be
Buffett has commented in the past that a buyback would only make sense if the shares of Berkshire Hathaway were significantly undervalued and there were no better apparent uses of the company's cash. Apparently both conditions are true in the market today.
Of course, this being Berkshire and Buffett, this is not an ordinary buyback authorization. No specific figure was placed on the authorization, other than that the company would maintain at least $20 billion in consolidated cash-equivalent holdings. Given the nature of Berkshire's business, it is not a simple thing to translate that into a net figure - the company has about $48 billion in straightforward cash on the balance sheet and a similar amount in fixed maturity and "other" investments. While Berkshire could certainly liquidate some of that, the company's insurance obligations and long-term investment strategies would preclude full liquidation.
There is another twist as well - the company will pay no more than 10% above current book value in the course of this buyback. While there is certainly room for timing and accounting differences, this means that investors will have at least a general idea of when Buffett might be in the market for his own shares.
The Reasons For and Against
One of the most common criticisms in the immediate aftermath of this announcement is that Buffett should have instead instituted a dividend. There are several reasons that this makes no particular sense for Buffett or Berkshire. For starters, dividend payments create taxable events and while Buffett may be more pro-tax than the average billionaire, he still likely sees no reason to unnecessarily increase the tax bill for himself or his long-term investors.
Second, why is everyone so excited about dividends these days? Money market rates are pathetic and it is hard to imagine that the core Berkshire shareholder is looking at those shares as a source of income. Last and not least, dividends are not a legal commitment but shareholders are loathe to see declines in the payout and Buffett likely does not want to commit to an ongoing cash outflow that could conceivably limit his future investment options.
A Larger Problem
There is a bigger and more legitimate cause for concern in this buyback announcement. Namely, it means that Buffett is not finding better ideas for his cash. That is particularly problematic as the growth rate here has been a growing concern and stocks like Coca-Cola (NYSE:KO), Gannett (NYSE:GCI), Johnson & Johnson (NYSE:JNJ) and Washington Post (NYSE:WPO) aren't going to help much. Likewise, Berkshire has done well for itself as something close to a corporate loan shark for the likes of Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC), but those opportunities don't come around very often.
Instead, there is an argument to be made that Buffett should be getting more aggressive with international expansion. Companies like Hypermarcas, Gome, Zara, ZTE and so on could be the major companies of the future and a major source of growth. Whether or not those are the best specific examples, the point stands that a company of Berkshire's size pretty much has to be a more global player if the growth rate is going to stay attractive.
The Bottom Line
Not surprisingly, Berkshire's shares jumped on the announcement of the buyback and in what might be considered an ironic twist, announcing the buyback has likely pushed the shares back up to a point where the company is not likely to be buying many shares. Still, if the market stays in its current mood, it is likely that Berkshire will be shaving down some of its cash hoard to repurchase its own stock.
Whether Berkshire Hathaway shares are cheap right now is always a popular topic to debate. In most respects, and considering the quality of the insurance businesses, the answer would be a cautious "yes." It's true that the company is not growing like it used to (and likely never will again) and it is also true that ever year that goes by increases the risk that Buffett will leave the stage. It is not a stock for everybody, but the company is a good allocator of capital and an adroit exploiter of market opportunities. (For additional reading, take a look at A Breakdown Of Stock Buybacks.)
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