Buffett buybacks: Could Berkshire tender stock?

[gfp]

John, the first quarter 2019 repurchases cost $1.69 Billion.  The second quarter repurchases cost $443 million (rounded up).

 

2.133 Billion minus 1.69 Billion gets you to the 443

 

The discrepancy in the Q1 cash flow statement likely results from the fact they were purchasing right up through quarter end (March 29th), and cash had not left the building for the settlement of some of the last shares purchased yet.  That's why the number in cash flow statement says 1.585 B in Q1, when in fact 1.69 billion worth of shares had been purchased.  Settlement is 3 days in the US

 

scorpioncapital,

 

I appears to me you have been looking at the movements in share counts for A & B in note 20 on p. 21. Those movements are half-year figures. You find the exact figures for the quarter on p. 47.

 

The easiest way to get the capital spent in the quarter on buybacks is to look up treasury stock acquired in the cash flow statement and calculate the difference to last quarter [in casu : USD 2,133 M - USD 1,585 M = USD 548 M].

 

If you calculate directly based on the buyback specification, you get USD 442 M.

 

The cash flow statement for 2019H1 ties with the buyback specifications for 2019Q1 and 2019Q2 on a total level, while there for 2019Q1 is an inconsistency between the cash flow statement and the buyback specification amounting USD 106 M.

 

Because the numbers fits on a total level for 2019H1, I dare to posture that there is an error in the cash flow statement in the Berkshire 2019Q1 10-Q [0_0]+[*holding my head low* & *arms up in front of my head* for incoming rotten tomatoes, rotten eggs, Scud missiles and the like!].

 

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[obtuse_investor]

To corroborate the repurchase numbers you can always check CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY. The $443M number is plainly mentioned there.

 

On a more strategic note, I can’t wait for the media to get bored and move on to some topic other than repurchases at BRK. Buffett is playing the long game. I am happy to play along.

[aws]

The shares outstanding on July 25th was exactly the same as June 30th, so they didn't repurchase any in the interim either.  That's not too surprising since it was only below $210 for a few days toward the end of that period.

 

His average repurchase this year has been at about $201 per share, so it seems like the price would need to be considerably under $200 for a reasonably long period of time for repurchases to be substantial.  I've definitely overestimated the degree to which he wants to repurchase shares and the price at which he was willing to do so.  This was mostly based on the initial data points in Q3 2018 and all of the talk since that day, but if anything it seems like he is less willing to do buybacks now by any metric than he was a year ago, despite all the talk to the contrary and the continual building of cash. 

 

If this were not the case then:

 

1. His aggressive buyback range would have crept up higher by now, so we'd see repurchases at higher prices

2. That more shares per day would be purchased when it was in that range, especially on the cheapest days

 

In Q3 2018, when he only had the authority to buyback shares for a few weeks, resulted in him repurchasing $927mm of shares over 14 trading days, an average of $66mm/day, at an average price of $207/sh.  Nine months later, the book value has finally increased beyond the Q3 18 level.  It's now about 2% higher, so you would think that if his appetite to repurchase shares were the same now as it was in Q3 2018, then his aggressive range would be about $211.

 

But he didn't buy any in May until the 28th, forgoing buybacks on days when the price ranged $200-205.  When it did break $200 he was buying, but over those four days he only spent $205mm or $51mm/day.  Considering Berkshire generates enough cash to do about $100mm in buybacks per trading day over the course a year, this is a paltry amount that would only slow the cash build rather than put excess cash to work.

 

It is disappointing in the sense that it seems like opportunities are being missed, but it's only clear in hindsight that he wouldn't find a better use for the cash, and even then I probably overestimate the impact of the missed repurchases.  I certainly hope he picks up the pace of repurchases, but I think I can live it and sleep relatively easy knowing that the cash will eventually go to quite a good use.

[Guest longinvestor]

Buying

 

..as rapidly as possible - KO, AXP, AAPL

..as slowly as possible - BRK

 

makes a lot of sense.

 

 

[John Hjorth]

... The discrepancy in the Q1 cash flow statement likely results from the fact they were purchasing right up through quarter end (March 29th), and cash had not left the building for the settlement of some of the last shares purchased yet.  That's why the number in cash flow statement says 1.585 B in Q1, when in fact 1.69 billion worth of shares had been purchased.  Settlement is 3 days in US.

 

Thank you for a convincing explanation, gfp,

 

That said, personally I would have brought the buyback specification to tie with the cash flow statement for 2019Q1 by adding the USD 106 M to "Treasury stock acquired" in the cash flow statement and accruing the same amount in top of the cash flow statement in the adjustments to earnings in the line "Changes in operating assets - Other liabilities" [Consolidation adjustment, or just enter the actual settlement debt in the general ledger for the parent before firing up the consolidation system].

 

And well, it doesn't really matter - it's peanuts for Berkshire.

 

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On another note more related to this topic - the possibility of a stock tender from Berkshire - and after spending a lot of time on Berkshire in the weekend - I did the same calculation that aws did to find out if shares were bought back in 2019Q3 till July 25^th, and reached the same conclusion as aws. What caught my eye was the extent of conversions of A-shares - 5,919 converted in 2019H1 and 772 non-Buffett shares converted in the business days of the first 25 days of 2019Q3.

 

Isn't that a lot? Anyone have any idea of what that activity is a token of? - It could be "the opposite" of a tender,  i.e. Berkshire refusing to buy stocks from A-holders, who - for one reason or another - are in need for cash [Estate settlements or partly sales to cover inheritance taxes under transfer of shares within generations.]

[alwaysinvert]

Mainly it's because of this: https://www.forbes.com/sites/robertwood/2019/07/09/warren-buffett-gives-3-6-billion-to-charity-how-to-supersize-your-donations-too/

 

My first guess would be that the non-Buffett shares are also somehow charity related.

[John Hjorth]

alwaysinvert,

 

I have already omitted/excluded Mr. Buffett's conversion on July 1^st ref. :

 

... 5,919 converted in 2019H1 and 772 non-Buffett shares converted in the business days of the first 25 days of 2019Q3. ...

 

These conversions being charity related - like Buffett's - seems highly likely.

[alwaysinvert]

The shares outstanding on July 25th was exactly the same as June 30th, so they didn't repurchase any in the interim either.  That's not too surprising since it was only below $210 for a few days toward the end of that period.

 

His average repurchase this year has been at about $201 per share, so it seems like the price would need to be considerably under $200 for a reasonably long period of time for repurchases to be substantial.  I've definitely overestimated the degree to which he wants to repurchase shares and the price at which he was willing to do so.  This was mostly based on the initial data points in Q3 2018 and all of the talk since that day, but if anything it seems like he is less willing to do buybacks now by any metric than he was a year ago, despite all the talk to the contrary and the continual building of cash. 

 

If this were not the case then:

 

1. His aggressive buyback range would have crept up higher by now, so we'd see repurchases at higher prices

2. That more shares per day would be purchased when it was in that range, especially on the cheapest days

 

In Q3 2018, when he only had the authority to buyback shares for a few weeks, resulted in him repurchasing $927mm of shares over 14 trading days, an average of $66mm/day, at an average price of $207/sh.  Nine months later, the book value has finally increased beyond the Q3 18 level.  It's now about 2% higher, so you would think that if his appetite to repurchase shares were the same now as it was in Q3 2018, then his aggressive range would be about $211.

 

But he didn't buy any in May until the 28th, forgoing buybacks on days when the price ranged $200-205.  When it did break $200 he was buying, but over those four days he only spent $205mm or $51mm/day.  Considering Berkshire generates enough cash to do about $100mm in buybacks per trading day over the course a year, this is a paltry amount that would only slow the cash build rather than put excess cash to work.

 

It is disappointing in the sense that it seems like opportunities are being missed, but it's only clear in hindsight that he wouldn't find a better use for the cash, and even then I probably overestimate the impact of the missed repurchases.  I certainly hope he picks up the pace of repurchases, but I think I can live it and sleep relatively easy knowing that the cash will eventually go to quite a good use.

 

I still think the main complication is that he can't get size and this was tested a bit in Q3 2018, with the result being that the stock gained pretty much every day for a month. If he could get $10b worth of stock at $200, I'm sure he wouldn't mind. But the issue is that if he ratcheted up buybacks fast in any one period, the market would be informed before he could gain much ground. He needs to somehow convince the market that he won't backstop the stock price and has failed to do so thus far. Hence the tepid buybacks.

 

This makes it sound like buybacks is the only thing on his mind, which obviously is not true. However, any feasible strategy for long-term use of funds without dividending out portions must necessarily include sizable buybacks.

[SwedishValue]

According to my math, Buffett has continued to repurchase shares in October corresponding to 1686 A-share equivalents. That would be around 500 Million USD up until the 24th of October.

 

This is in addition to the 213 A shares and 3 168 863 B shares he bought back in q3 for around 700 Million USD (didn't bother with the exact number here, it's thumb-sucking levels anyway).

[DooDiligence]

According to my math, Buffett has continued to repurchase shares in October corresponding to 1686 A-share equivalents. That would be around 500 Million USD up until the 24th of October.

 

This is in addition to the 213 A shares and 3 168 863 B shares he bought back in q3 for around 700 Million USD (didn't bother with the exact number here, it's thumb-sucking levels anyway).

 

Seems like just losing pocket change in the sofa.

[Guest longinvestor]

There was a mention here as well as elsewhere that “If Buffett doesn’t buy at these prices, why should we?”. It’s a fair question after all for this community of value investors but an enormously important one for Omaha. They must hope that most market participants keep this sentiment and don’t buy, for as long as possible. Besides large single block purchases, the stock selling below IV is needed. Sentiment driven versus fundamentals. Mungofitch over at TMF points out that per share earnings grew 13.5% yoy. That’s with only 75% of the engine working. We’re in a good place, cash pile be da$@ed.

[Guest longinvestor]

With the stock price bonhomie underway, what would be of most interest is if buy backs are continuing, even in dribs as has happened. We will find out in Feb, 2020, won't we?

 

 

[John Hjorth]

There was a mention here as well as elsewhere that “If Buffett doesn’t buy at these prices, why should we?”. It’s a fair question after all for this community of value investors but an enormously important one for Omaha. They must hope that most market participants keep this sentiment and don’t buy, for as long as possible. Besides large single block purchases, the stock selling below IV is needed. Sentiment driven versus fundamentals. Mungofitch over at TMF points out that per share earnings grew 13.5% yoy. That’s with only 75% of the engine working. We’re in a good place, cash pile be da$@ed.

 

Thanks, longinvestor,

• We [still] don't know what's going on on Mr. Buffett's working desk [actually, as I understand the situation : The desk of the father of Mr. Buffett], day by day [and we never will]. Personally, I'm a firm believer [religious or not? - the reader of this post is to decide] that he isen't spending his time power-napping on a couch in his office.
  
• CAPEX spent in the first 9 months in companies already owned by Berkshire : USD 11.193  B, up from same period P/Y : B 10.040 B. The work by among others Mr. Abel - Investing in the future of Berkshire. These investments are investments where internal hurdle rates are met, not purchases of new brushes to toilets, toilet paper or what do I know.
  

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And even what appears miniscule buybacks add up over time, yes.

[valueinvesting101]

Just read this transcript from 1996 AGM:

 

30. Berkshire businesses worth more than book value

WARREN BUFFETT: Zone 6.

 

AUDIENCE MEMBER: Mr. Buffett, my name is Steven Tuchner. I’m a shareholder from Toronto,

Canada. And my question concerns the valuation of Berkshire shares.

Given the large number and dollar size of the private businesses recorded at historic cost, which

Berkshire owns, shouldn’t the multiple to book that the stock trades at, essentially, expand over

time to reflect the increases in intrinsic value of the private holdings?

 

And I cite Buffalo News on the books at, essentially, I think around zero. And even GEICO now

will be on the books at, probably, between 3 and 4 billion — worth more than that — as

examples of the disparity between intrinsic value and book value?

 

WARREN BUFFETT: Most of the businesses that we own all of, or at least 80 percent of, are

carried on the books at considerably less than they’re now worth.

 

And with some of them, it’s dramatic, although it’s not dramatic compared to a $40 billion total

market valuation for Berkshire. It’s dramatic relative to the carrying price.

 

Because when we bought See’s Candy for an effective $25 million in 1972, it was earning 4

million, pretax. It earned over 50 million, pretax, last year. When we bought the Buffalo News,

it was making nothing. Paid 30 and a fraction million. And it’s now earning, maybe, 45 million.

And we’ve got a number of businesses. And GEICO’s worth more than we carry it for because of

the accounting peculiarities of the first 50 percent.

 

So, it is true that, overwhelmingly, our businesses are worth something more than intrinsic

value — than book value — and, in many cases, very substantially more, although that’s

reflected in the market price of our stock.

 

I don’t think you can go from year to year and trace the intrinsic value precisely by changes in

book value. We use changes in book value as a very rough guide as to movement, and

sometimes I comment.

 

There have been certain annual reports where I’ve said our intrinsic values grew more than the

proportional change in book value, and there’s been others where I’ve said I thought it was

roughly the same.

 

So, I don’t think you can use it as a — stick some multiplier on it and come up with a precise

guide — a precise number. But I do think it’s a guide to movement.

 

Our insurance business, though, is the most dramatic case of dollar difference between book

value and intrinsic value. I mean, the number has gotten very big over time there. I personally

think it will tend to get bigger, because I think GEICO will grow, and I think our other businesses

will do well.

 

The trick, of course, is to take the new capital as it comes along — and not from the issuance of

the B, because that’s relatively small compared to the amount of capital we will just generate

from operations.

 

Our float will grow from year to year. Our earnings will be retained. And we’ve got to go out

and find things to do that three or five years from now that people say, “Well, that’s worth

more than the book value.” And that’s a job. It’s a tougher job than it was. But it’s kind of fun.

 

[alwaysinvert]

$2.2b for the quarter. Adjusted for share issuance in Q4 but not in Q1 thus far (as we don't know those numbers), there should be additional repurchases for just shy of $400m up to Feb 13.

 

Top price paid in Q4 per B of ~226 and probably a bit higher than that in Q1.

 

The hotline number for selling back shares takes a proper tender offer off the table for at least the next couple of years imo. But maybe you can frame this as a form of "sneaky" tender offer which could potentially give extra large volumes from institutional owners if we ever see significant outflows from the market again. It will be interesting to hear if he touts this offer on CNBC on Monday, as the awareness of it from the letter alone may not be enough.  A dividend will definitely not happen either before this method of buyback has been tested.

 

Anyhow, it is finally something of an admission that the market just will not acommodate large enough volumes for repurchases, at least not until enough of Buffett's shares get out there.

[CassiusKing1]

Could WEB's donated shares to the Gates Foundation be "tendered" back to Berkshire Hathaway?

[alwaysinvert]

Could WEB's donated shares to the Gates Foundation be "tendered" back to Berkshire Hathaway?

 

It surely would be a logical solution for Berkshire to directly take the 5 million Bs they sell into the market every quarter. But this has been discussed quite a bit and appearances may make it less than ideal. Also, why wouldn't they have made the arrangements for that already then? Maybe it can now more easily be done as part of a larger policy of buying back on demand outside the market.

[Guest longinvestor]

Could WEB's donated shares to the Gates Foundation be "tendered" back to Berkshire Hathaway?

 

I thought he elaborated in the letter that he has instructed his estate’s trustees to keep it “all in Berkshire shares” to the moment of disbursements. Even with the small  possibility that this may not work out as well as he’s hoping it will.

[Mephistopheles]

Could WEB's donated shares to the Gates Foundation be "tendered" back to Berkshire Hathaway?

 

I thought he elaborated in the letter that he has instructed his estate’s trustees to keep it “all in Berkshire shares” to the moment of disbursements. Even with the small  possibility that this may not work out as well as he’s hoping it will.

 

Well the Gates foundation has to sell the donated shares within a year or two after receiving.

 

The instruction for his estate is for his personal shares that he owns, not the ones that are already donated. He has instructed the estate to hold on to all the shares and donate them per the schedule over the 10-15 years after he dies and to not sell the shares.

[John Hjorth]

Carrying some posts and quotes recently from another topic in the Berkshire Forum, to this topic :

 

I don't think it's comfortably below. If it was comfortably below then they would be buying ooodles of stock but they're not. They weren't buying ooodles around the 200 level either.  So I'd say that they're probably not overly excited the discount.

 

This would be a foolproof argument if they *could* easily buy oodles of stock over the market. But they can't. I'm not saying that he thinks it's at 50% of IV, but probably - at most - something like 80%. There is room to be somewhat more aggressive with bids over the market, but likely not as much as people seem to believe. If suddenly buyback volumes in a quarter were ratcheted up 100% from these levels, the stock would take off, making further buybacks that much harder. There is both a volume problem and a serious front-running issue. Also, as Munger expresed recently, other opportunities are dwindling while cash is growing.

 

He has every incentive to undersell the fact that they were doing buybacks all the way up until Dec 31 and that's what the overall effect of the letter was, while still, oh-so-galantly, offering to relieve people of large blocks of stock. Just like he last did in the 1999 letter, mind you:

 

Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to

delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find

that repurchases make sense, we will only rarely place bids on the New York Stock Exchange (“NYSE”). Instead, we

will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call

Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the “third market” or on the

NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not

engage in transactions involving fewer than 10 shares of A or 50 shares of B.

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.

I'm sorry, but I'm with Viking on this one.

 

I don't buy the it's hard to buy stock argument. You have to keep in mind that this is Buffett we're talking about. He may be a geezer but he's probably one of the savviest stock traders that ever walked the face of the Earth. He didn't have a problem buying huge amounts of stock in ANY company if it meant making money. And we're not talking here just large companies like Coke and Apple. We're talking obscure shit like Sanford Map and other stuff. The man know how to buy stock if he wants to. But all of a sudden it's hard for him to buy stock in the 5th largest corporation in America? Nah man.

 

If he's not buying huge amounts of stock is because he doesn't want to, not because he can't or doesn't know how.

 

I guess Buffett is just completely full of shit here then:

 

-Certainly an interesting discussion! [-and to me, more relevant in this topic][ : - ) ]

[Gregmal]

I do find it interesting, but agree he's probably a little full of it, although not in a nefarious way. Everyone knows, if you cant get stock at market, the move is to tender. If he's not tendering, he's not that serious about buying stock here.

 

However what I did like, is that it seems we're moving towards repurchases, at least in terms of my interpretation of the tea leaves. If we figure the ~125B or whatever cash piles just stays as is, its not unreasonable to deduce that the balance of future earnings not needed for the business should be returned via buybacks. I'm cool with that. At least until more compelling things come along.

[SwedishValue]

I thought before this report there was a good chance of a liquidity event of some sort, most likely a tender in that case. With good chance I mean ~10% chance. The way things played out, and seeing Buffett's new hot line, I believe a tender is significantly less likely at least for a year. If Buffett can't increase his buyback volume with this new method and the stock does not move to become significantly more expensive, I think a tender or something similar will only have a negligable chance for the upcoming year.

 

One aspect that might discourage Buffett from doing a tender, is that offering to tender at X might make the stock move to above or around X with tendered volume being significantly less than Buffett wants. For a tender to work, it has to be big enough to be done once but also creating enough value for Berkshire to make it worthwhile.

 

Doing this hotline thing might actually be Buffett's best bet as of now. I've been wrong on so many things, but I appreciate the discussion and especially the thoughts from alwaysinvert.

 

Disclosure: long Berkshire but not as significantly as I was this last friday.

[Guest longinvestor]

Buffett made two statements about the buybacks:

 

1 - Not enough big blocks traded - except estate type selling, which is rare

2 - Berkshire holders tend to buy the stock to keep; He went on to say that the relative amount of speculation is lower with BRK versus a BOA et al.

 

As to point #2, I'd like to understand something; Was there less speculation when the B shares were pricier at 1/30 of A; (1996-2009) relative to the current 1/1500 of A. Any one have some insight into this? Anything written by Buffett about this?

 

 

[SwedishValue]

Go back to the CNBC Buffett archive and listen to the AGMs between 1994 to 1996. There was a LOT of discussion regarding this.

[thepupil]

Buffett made two statements about the buybacks:

 

1 - Not enough big blocks traded - except estate type selling, which is rare

2 - Berkshire holders tend to buy the stock to keep; He went on to say that the relative amount of speculation is lower with BRK versus a BOA et al.

 

As to point #2, I'd like to understand something; Was there less speculation when the B shares were pricier at 1/30 of A; (1996-2009) relative to the current 1/1500 of A. Any one have some insight into this? Anything written by Buffett about this?

 

I think all that he is saying is that Berkshire's liquidity is low relative to its float and market cap.

 

For example, just to use a stock that potentially has more "speculation" in it, ServiceNow trades about $560mm / day. Berkshire (adding A & B) trades $880mm / day.

 

Berkshire Hathaway is a $540 billion company. ServiceNow is a $63 billion company.

 

NOW trades 0.88% of its market cap / day.  Berkshire trades 0.16% / day. all else equal its easier to buy (on a percentage basis) 5% of NOW than BRK/A/B.

 

AAPL trades about 0.5% / day (but mind you that's $6.4 billion average value traded), it's easy to buy oceans of apple shares. TSLA trades 2.7% of its market cap / day and traded $54 billion (1/3 of its market cap, higher percent of float) in one day at the height of TSLA-mania

 

there are only about 250 trading days / year, so it's very easy to see why Buffett is "complaining" about his pesky hold forever ownership base.

 

I don't think it's any more complicated than that.