Share Repurchases

[bizaro86]

Bizaro, than we totally agree on your point of view. sorry.

 

No worries at all. I find this news quite exciting (both as a Berkshire-follower and for personal financial reasons) so I may not have expressed myself very well initially. That seems especially likely given that two respected members interpreted it the same way, so obviously I wasn't clear.

[gfp]

Yeah, Bizaro had it right - a flexible plan is the only way they actually get a meaningful repurchase done.  Sadly, they won't be buying until August (if the price stays low) -

 

"Berkshire will not initiate any share repurchases under the amended program until it publicly releases its second quarter earnings, currently scheduled after the close of the markets on Friday, August 3, 2018."

[Guest longinvestor]

While we wait for some color on this from Buffett, I am wondering if this marks the end of BV multiple as the most fitting method of valuation? There have been a few signals to this effect with how the IV section of the annual letter has morphed over the past few years.

[scorpioncapital]

Could this signal some belief that intrinsic value and BV are further disconnected by Inflation?

[rb]

Yeah, Bizaro had it right - a flexible plan is the only way they actually get a meaningful repurchase done.  Sadly, they won't be buying until August (if the price stays low) -

 

"Berkshire will not initiate any share repurchases under the amended program until it publicly releases its second quarter earnings, currently scheduled after the close of the markets on Friday, August 3, 2018."

My guess is that they're gonna have a monster Q2.

[Dynamic]

I too think Q2 is going to be very good especially in GAAP terms and rise in BV.

 

I do wonder if a significant block of stock has been offered to Berkshire for example for reasons such as estate planning, as it was the last time they modified the repurchase plan, so that transaction could be conducted after the next earnings release at a price well above $170

 

On the other hand, now that the Apple position is full sized (above 5% of Apple seems to be where Berkshire would have to file Form 4 with SEC) they may have just decided not to tie their hands behind their backs with a publicly disclosed limit any longer so they can stop to cash pile building as much as it probably has during Q2 and without a precise figure known publicly they'll be able to actually buy back a lot of stock instead of setting a soft floor under the price. With this thought in my mind I immediately understood what bizaro86 meant in the earlier post.

 

As for the stock price action, here's some rational speculation. I imagine that 120% of Book Value will probably remain a soft floor, perhaps with a thick layer of a spongy carpet on top!

 

In other words in times of low prices, there will still be a lot of buyers with the old threshold in mind as being a sure bargain price, giving a reasonably firm lower bound to the trading range except in extreme circumstances. But I'd also imagine that there will be a slightly increased willingness to buy at various prices above this threshold. These softer buy prices may gradually become refined as people infer from future buybacks at what price Berkshire seems willing to repurchase its stock. If a consensus builds, this may firm up the metaphorical carpet on the soft floor by increasing buying interest above 120%BV and resist price falls a little more strongly even than now.

 

BTW, the after-the-close market and the FRA:BRYN stock thinly traded in Frankfurt on the morning 18th July show almost a $3 rise to around $193.28. I woke up a little confused that my broker said my portfolio was up so much, but they showed the closing price when I opened the app instead of the after market trading.

[Guest longinvestor]

Rational thinkers they are, what would have lead them to pull the trigger on buybacks right now? Can think of a couple of things,

1. For every deal that comes across their desk, they found BRK stock a better deal. With what is “knowable “

2. Their intent to buy in shares has been denied by the market. They may never be able to, with pre-announced thresholds.

3. They like single block purchases and with a number of estates to be settled over the coming decade, the threshold is an obstacle to making rapid decisions when such deals present themselves.

[gfp]

Rational thinkers they are, what would have lead them to pull the trigger on buybacks right now? Can think of a couple of things,

1. For every deal that comes across their desk, they found BRK stock a better deal. With what is “knowable “

2. Their intent to buy in shares has been denied by the market. They may never be able to, with pre-announced thresholds.

3. They like single block purchases and with a number of estates to be settled over the coming decade, the threshold is an obstacle to making rapid decisions when such deals present themselves.

 

Seems like Charlie wanted to do this for a while.  They are also likely to report a pretty big headline number for consolidated cash balances in the next report, with more criticism of "swing you bum."

 

One upside of having a board of directors full of experienced investors who personally own material amounts of stock is that they prefer this route (growing per share intrinsic value, even if it means "shrinking" the company) to growing the empire at all costs.

 

 

[Guest longinvestor]

“Do your own IV Calculation” is a message here. That BV multiple has been interpreted differently. The market appears to not have bought because the company didn’t. Now the signal is likely to be the opposite. When company buys, market follows. We’ll see after August 6 or rather, November 15!

[Guest longinvestor]

It’s been just over a year since the anchor of the BV multiple was removed. So, what’s happened since then?

 

1. BV is clearly relegated down in any conversation about evaluating the business. A year or two from now, it’s likely to be forgotten in such conversations.

2. Stock price today is exactly the same as a year ago.

3. Folks are generally angrier with management over buying less than 5B!

4. Management has aged by one more year, and admit to becoming more stubborn.

5. Old economy became older by a year, brave new economy defies more of everything. FANG’s are about a trillion more in market cap.

6. Bitcoin groupies happy hour with Munger at Berkshire annual meeting and now Sun willing to pay $4.5 Million to share a meal with Buffett. Not with Zuckerberg et al.? Hmmm. Wonder why?

 

7. The Sun has risen and set 365 times

 

 

 

[nickenumbers]

Longinvestor,

 

That is a good summary you have outlined.  It makes me stop and reflect on the situation at BRK.

 

BRK has admitted to creating a company where piles and piles of cash pour into HQ.  And their job is to allocate it to highest and best use.  Allocate, allocate and when they have more than enough cash and no other alternatives and the BRK share price is additive to Intrinsic Value, repurchase shares..!

 

Our Shareholder collective patience is exhausted with the promise of BRK share repurchase.  If BRK has made meaningful share repurchase in the last 3 months, EXCELLENT!  If not, I just shake my head at this point.

 

[Dynamic]

I think over the years, Berkshire's share price has probably been better correlated to Book Value (or perhaps highest reported Book Value) than to any other simple financial metric. As I understand it this applied before the old buyback policy was put in place (first at 110% of BV, then within about a year of that increasing to 120% of BV as they agreed a block transaction at about 120% of the last published BV).

 

I've heard that this was considered the best metric for many years by ValueLine (I think that's the name) and also Mungofitch over on the Motley Fool Berkshire messageboard keeps some statistics over a very long period comparing prices to last-reported BV and to high-watermark BV and noting how rarely, for example, P/BV falls below 1.3 and what the typical returns are. He also has a 2½-column approach valuation measure similar to Buffett's approach which he says seems to very well track the average price over a year, with ups and downs superimposed on it. He can usually quote stats such as:

The price to known book ratio has been this low only 5.5% of the time since the first buyback plan was started 6.2 years ago.

That's with price spot on $300k per A/$200 per B as I type.

That $200 was in Feb and was 1.31x the 2018 Q3 BV of $152.475 per BRK.B.

 

Mungofitch has had to modify his 2½-part valuation method to adjust for the tax cut, but it also remains a good predictor of average price over 6-12 months. He also mentioned in the same thread in February that price-to-peak book is a better predictor than price-to-last-known-book in the 1996-2016 starting points.

 

* Example:

Buy during cheapest 5% of the time based on price-to-peak-book since 1996, average two year forward real return 23.02%/year.

Buy during most expensive 5% of the time based on price-to-peak-book since 1996, average two year forward real return 0.01%/year.

That's a "predictive power gap" of 23.01%.

 

Using most recent known price-to-book value, the predictive power is weaker.

Buying during cheapest returned 20.58%, buying during most expensive returned 1.78%.

So the "predictive power gap" is only 18.8%.

That doesn't sound like it's much worse as a predictor, but bear in mind that book and peak book [differ] only about a fifth of the time.

So, if one buys the notion that market value ultimately tracks fair value, it is consistent with

the thesis that a multiple of "peak book" is a better proxy for value than a multiple of "current book".

 

It will be interesting to see if the close correlation between BV and share price changes anytime soon, now that the formal buyback policy has decoupled from BV and now that Book Value per Class A share is no longer specifically mentioned in the News Release that accompanies each 10-Q or 10-K filing nor will it be included in next year's Annual Letter to Shareholders. It is easy enough to calculate and does appear on various data sources like Yahoo Finance of course.

 

Now that some of the past history of buybacks is disclosed, perhaps some people will perhaps anchor to those price ranges instead of BV multiple. If they anchor too heavily when Berkshire's IV continues to grow, it could provide opportunities for much greater buybacks if the conservatively calculated IV grows sufficiently far above it for Berkshire to consider it among the best uses of funds to buyback very heavily. I would not be at all surprised to see BV in 2019Q3 (published in November) come in well above $160 per BRK.B, probably at least $10 above the Q1 figure in the space of 6 months, albeit perhaps only about a 6% rise from the high point at 2018Q3. That could change Mr Market's mood a little, but if the share price remains close to $200-$210, it could look like a very attractive repurchase opportunity for Berkshire. I'm pretty sure Berkshire's IV has risen by at least 6% and more likely 10% since last year when a few repurchases were made at $207 average, meaning $220-$227 would make a sensible price for only modest buybacks this August, so prices below $210 might see somewhat greater buyback volume this time, and prices below $200 would probably see more significant buybacks, and below $190 they might be heavy. Still, I'd be rather surprised to see more than $3 billion spent on buybacks in Q2, though it would be a pleasant surprise.

 

Strategically, I'd also imagine that Berkshire's buyback policy should not be linear and predictable. Better that it reflects the universe of alternative investment opportunities anticipated and looks a little random and illogically weak at times.

 

Looking at possible alternative valuation approaches that might influence future share prices if BV loses its correlation...

 

GAAP EPS as a metric for Berkshire's valuation has always missed a lot of hidden earnings and is crazy now that it includes unrealized gains on stock positions, so that won't be used.

 

Look-Through Earnings (ignoring the unrealised gains) seems reasonably good, but it's not part of the official financials. According to this article from October 2018 that I've just come across... (emphasis mine)

But including the calculation tells another story. DeWitt’s estimate for 2019 EPS is $10.25, and she says total look-through earnings are $15.44. The B shares trade around $209, or 13.6 times 2019 look-through earnings.

 

The 13.6 is low for Berkshire’s B shares. Its historic average price-to-look-through earnings is closer to 17, the analyst noted. Her B-share December 2019 price target is $250, about 19 percent above where it currently trades.

 

Funnily enough, I think I came up with about $15.48 per BRK.B share of L-T earnings (portfolio look-through earnings, plus operating earnings) in late Feb. As a conservative IV estimate I then applied a 15x P/E multiple (6.67% earnings yield) to come up with $232 as a pretty darned conservative IV, and would guess that prices at 80-90% of that ($186-$209 or so) would encourage Berkshire to buy back stock, more aggressively at lower prices, I'd imagine.

 

Applying the 17x multiple that J.P. Morgan analyst Sarah DeWitt mentioned, would be $263 as a more typical price if the $15.48 Look-Through EPS still stands, with $210 representing a 20% discount to IV, and $184 a 30% discount, as another way to look at things. $264 happens to be an average of different intrinsic valuation methods published by Semper Augustus, though I'd be a bit surprised if the share price even reaches $260 during 2019 or early 2020 even if L-T earnings is now nearer $15.80-$15.90. I think perhaps the tax cut has inflated EPS so the multiple of 17 might not tie in with typical Berkshire share price under a 21% federal tax rate.

 

Given that BV of around $150-$160 per BRK.B is about 10x Look-Through Earnings, that also ties in well with a 10% return on equity, close to the 10.98% compound growth rate in known Book Value per share and 9.30% compound growth in stock price over the last 16 years, the difference reflecting a decline from about 1.6x BV to 1.3x BV multiple from July 2003 to July 2019.

 

Now, as a saver still, I'd actually be happy if the stock price languishes a little longer, and I'm not banking on 20%+ per annum compounding for the next 2 years (that would be around $300 by July 2021, so perhaps something around $260-$280 is more realistic - about 12-17% 2-year cagr barring a recession. I'd also be happy for the price to languish to enable cheaper buybacks and retirement of more shares well below IV.

[scorpioncapital]

Interest rates are so low that a p/e of 15 is a joke. Try 30 or 40x if this interest rate-high inflation creating environment persists.

 

 

[Dynamic]

OK, but I wouldn't call it conservative to use such a multiple or to assume such rates will persist. 15* is definitely a very low ball conservative IV however

[John Hjorth]

Longinvestor,

 

That is a good summary you have outlined.  It makes me stop and reflect on the situation at BRK.

 

BRK has admitted to creating a company where piles and piles of cash pour into HQ.  And their job is to allocate it to highest and best use.  Allocate, allocate and when they have more than enough cash and no other alternatives and the BRK share price is additive to Intrinsic Value, repurchase shares..!

 

Our Shareholder collective patience is exhausted with the promise of BRK share repurchase.  If BRK has made meaningful share repurchase in the last 3 months, EXCELLENT!  If not, I just shake my head at this point.

 

nicke,

 

I have been through the whole emotional spectrum with regard to Berkshire share buybacks, too. Personally & today, I think of my personal ideal/theoretical share of the Berkshire cash & T-bills as capital, on which patience is outsourced. So, it allows me to take more risk on other positions. [Naturally, this line of thinking is not really applicable, if one is really heavily invested in Berkshire.]

 

Berkshire provides good staying power in investing. That also matters a lot to me.

 

- - - o 0 o - - -

 

Personally, I expect, that Mr. Buffett has added in a meaningful way to JPM in 2019Q2. Time will tell.

[nickenumbers]

John Hjorth,

 

Thanks for the post and the perspective.  Thinking of BRK as a store house of Cash and T-Bills as a proxy for taking a bit more measured risk in other positions in my portfolio is a creative thought.  Thank you for sharing it and I have not previously considered that.

 

It reminds me of the Seth Klarman/WEB quote "The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own."

 

 

It would be exciting of BRK were to repurchase shares, but I prefer for them to just put it to its highest and best use..  [longinvestor- good topic]

[John Hjorth]

nicke,

 

Please feel free just to call me John. [ : - ) ]

 

I still remember hitting the bull's eye [at least pretty much, I think] on reverse engineering the Berkshire buybacks for 2018Q3 and posting actively about it here on CoBF, after which everything collapsed calculation-wise for the following quarter for me. [-lol!]

 

is a link to a visualization of Mr. Buffett & Mr. Munger, if they had read my posts back then.

[Guest longinvestor]

It’s evident from the nature of conversations since the buyback mechanism shifted from BV that management can claim “Mission accomplished”.

 

What I mean to say is that ever since they announced to the world that they intend to buyback, in 2011, no buyback ever happened. The market pricing mechanism was singularly weighted on that. In effect, it was their spoken word that came in the way of their intent. It appears that Munger forced Buffett’s hand by adding the “whenever Warren Buffett and Charlie Munger deem” language into the buyback announcement. Buffett must have added the “conservatively calculated”.

 

That is where we are. Guessing as to the two words. When and conservatively calculated. Is it 15x or 18x or 30x? add the Insurance grove or not? And most importantly what kind of a discount will cause salivation for two nonagenarians The intrigue is necessary for them to pull off big buybacks. The longer the market underprices, the better. If you’re a long termer, patience pills could help.

 

 

 

[scorpioncapital]

So he can pull up a comparative chart of SP500 vs BRK and if he's not happy with it not outperforming by a point or two he can do a big buyback one quarter, or threaten to and right back on track )

 

[ABM]

If BRK fell 50% tomorrow, how much do you believe Buffett could reasonably allocate to share repurchases assuming he is not willing to risk the solvancy of the insurance segment?

 

It may not be as much as many think with the figure likely less than $50B but above $25B. Obv it is meaningful if valuation is cut by 50%, but likely <20% accretion to BVPS even under these scenario.  Unclear, if market re-rates the equity due to the resulting boost in the assets to equity leverage ratio. et. 

 

Either way, the limited repo activity and the historically low leverage ratio is signaling his view the BRK equity is close to fair value.  Buffett use to demand 50% discounts to IV and I realize the hurdle is much lower these days but I believe the reported 15% discounts being discussed is not registering as firesale in his eyes.

   

 

 

 

 

[Mephistopheles]

Or maybe Buffett is more of a macro guy than we think. Maybe he sees an economic and/or stock market downturn. Total Market cap to GDP is nearly the level it was in the tech bubble, at least according to this: https://www.gurufocus.com/stock-market-valuations.php

 

Take a look at his JPM purchase. Why spend $4 billion to buy shares but then not make it a full position? Seems he wants to nibble for now while making a market call.

 

"do as I say, not as I do"

[Dynamic]

I have taken a good look at the situation reported in the 10-Q now.

 

It seems that although Float has risen to about $125 billion, the cash and equivalents have increased further to $139 billion.

 

It seems that with regard to the portfolio, if I take my quarter end value (excluding KHC) and add the 31,081,000 shares of BAC that were added at $29.00 closing price, then subtract the -43,387,980 USG holding at $43.50 Knauf takeover price, I get a portfolio valuation of $200,597 million versus Berkshire's 10-Q $200,516 million based around the previous 13F filings.

 

I'm usually a little bit out, but it doesn't look as though Berkshire has been buying a lot of stocks net in the quarter.

[Dynamic]

Of course, although it hasn't left the building yet, the $10 billion 8% loan to Occidental Petroleum to assist them in taking over Anadarko is a substantial allocation of capital, so assuming I've interpreted the accounts properly, the cash balance after accounting for that would be $129 billion, still pretty much balancing insurance float.

 

The shareholder vote on that takeover is on Thursday 8th August, coincidentally the same day KHC is due to report their first half year earnings (having missed the normal 10-Q timings after restating some of their previous annual financials). 26.7% of those earnings will accrue to Berkshire's earnings to be reported in Q3.

 

My guess it that the main external capital allocation flows in the quarter have been:

+$10.0 bn allocated to OXY loan at 8% with warrants but not yet paid until acquisition is approved.

+$0.8 - $0.9 bn allocated to BAC purchase 31,081,000 shares bought at around $28 to $28.50 per share.

-$1.9 bn cash received on USG takeover. (and perhaps $0.2-$0.3bn allocated to future tax payments on the gain)

+$0.3 bn (very approximately) in other net equity additions to the 13F-HR portfolio

 

I think in the context of the OXY preferred deal, it took the pressure of finding major investments in equities (including buybacks) when prices were OK, but not enormously attractive, yet still the cash levels that remain after deducting $10bn we're expecting to pay to OXY remains close to the insurance float, netting out any appreciable cash drag and keeping ample dry powder ready for any truly significant opportunities that may come up in the next year or three.

[scorpioncapital]

Why should he buyback shares before the quarter report comes out when he knows / or suspects weakness in operating cos/industrials/trade war and speculates berkshire share price may drop after earnings? Wouldn't it make sense to just wait , buy a little and buy a lot after earnings comes out? Is there any SEC rule says he can't do this?

[John Hjorth]

Why should he buyback shares before the quarter report comes out when he knows / or suspects weakness in operating cos/industrials/trade war and speculates berkshire share price may drop after earnings? Wouldn't it make sense to just wait , buy a little and buy a lot after earnings comes out? Is there any SEC rule says he can't do this?

 

scorpioncapital,

 

Your considerations are on a wrong basis. In the "Can Berkshire tender stock" topic we've reached the conclusion, that the share buybacks at Berkshire are not based on safe harbour rules, because Mr. Buffett & Mr. Munger want to buy back shares in an opportunistic way. Thus, Berkshire can't buy back shares in four silent periods during each year, which leaves only about 8 months left to execute share buybacks.