Gustavo Ballvé on September 26th, 2011
Corporate Governance, Corporate Strategy, Food for thought, Home, Industries, Insurance, Portfolio Management

Landmark announcement today: the Berkshire board of directors has approved an “authorization” for a share repurchase program. Berkshire being what it is, it’s different from the usual buyback: there’s no maximum amount, no set period of time – in fact, there isn’t even the obligation to buy back any stock at all. There are only two rules: if share purchases do occur, Berkshire will not pay above 110% of book value per share and it must maintain a cash balance greater than US$ 20 billion. As Buffett likes it, there’s no “mandate” other than “intelligent investing”. It’s not the first time ever that Berkshire has authorized a share repurchase, but the last time it did so the stock went up a lot immediately and, in Buffett’s words, “defeated the idea”. Today the shares closed up 8.1% (Class A) and 8.6% (Class B). More comments and links inside.

The first task is clarifying what this means: it’s not necessarily a sign of his pessimism regarding the US or Global economy, it’s not necessarily an admission that he can’t find any acquisitions worth doing – neither private nor listed – despite a down market, and it’s not necessarily a sign of an impending retirement. It can mean all those things simultaneously, but the only logical conclusion that can be reached given what we know is this:

Buffett thinks that Berkshire’s valuation is approaching (or at) levels at which it’s a better use of part of Berkshire’s cash to buy back its own shares, compared to immediately available options that fit Berkshire’s rigorous criteria. These conditions may have changed today (and the 8% share price increase certainly affects this program), may change tomorrow or in 10 years from now, and in the meantime he’s still setting aside at the very least US$ 20 billion to invest in other opportunities should they come up (he’s just invested US$ 5 billion in Bank of America preferred shares and warrants and had bid for Transatlantic). And let’s not forget that Berkshire generates over US$ 10 billion in cash per year. Buffett himself has made it quite clear in the past, not only by writing about it but also by never once repurchasing shares (so far), that repurchases are supposed to be a rare event. Maybe its time has come, maybe not.

Another point: we had posted a few days ago about Alice Schroeder’s opinion on the hiring of Ted Weschler as portfolio co-manager. In this video interview today, also embedded below, she argues that this may be yet another step towards de-emphasizing Buffett’s role at Berkshire: with less cash to manage, the “Buffett premium” ceases to be as important, or so the theory goes. We’d rather wait before reaching this or any other conclusion.

Alice Schroeder interviewed for (do yourselves a favor and jump to 5:00 or so: the guy before Ms. Schroeder doesn’t know what he’s talking about):



Value Line

Wall Street Journal (video below):

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