Buffett buybacks: Could Berkshire tender stock?

[marazul]

Is there a 25% of daily volume limit on buybacks? Sorry for my ignorance.

[John Hjorth]

marazul,

 

Link to post in this topic by globalfinancepartners, where also the rules were discussed in depth. Personally, I consider globalfinancepartners very well wandered in this space of regulation. Please also note globalfinancepartners' personal comments and opinion in this particular post. What I have simulated, is a maximum. Please make your own assumptions based on that.

[Guest longinvestor]

My WAG is that they bought around  $10B worth during the quarter. 25% trading volume at average prices during the quarter.

[nkp007]

I'm thinking they don't buy back anything substantial.

 

When the equities they love are selling off like crazy (e.g. financials, Apple, other names across the spectrum), I think they're deploying to those stocks or holding on for more cash expecting more opportunities to emerge, especially as liquidity / financing starts to tighten.

[gfp]

I would guess that they are repurchasing around $66 million per trading day that the price is below their cap.  What we don't know is what the current cap price on the plan is, which means we can't estimate how many trading days they were in the market purchasing shares.  We know they purchased some subsequent to quarter end and we know they continued purchasing shares when prices came back down.  It is possible that the price cap on their repurchase plan stayed the same, at around 208 per share B share equivalent, in which case they would be active in the market only on days the B shares traded under 208.  Or it could be that the cap is as high as 218 per B share or thereabouts (if it is based on a simple multiple of last reported book value), in which case they would have been active buying shares for more trading days and would have repurchased more shares.

 

I do not think they are varying the buying under the plan with the price at 195 vs 207 per B-share.  I think it is a target percentage of average daily volume with a price cap, executed as a 10b5-1 plan by a brokerage firm.

 

Over time, we should be able to figure out if they based their cap on a simple multiple of last reported book value by looking at the number of days they were active in the market and the corresponding market prices on those days.

[John Hjorth]

I'll try to reverse engineer the market data for 2018Q3 using my tool. I will need to tweak it a bit to take into consideration blackout periods. I expect to do it between Christmas and New Year. I'll put some charts and diagrams in there, too, to visualize things.

 

And then repeat the procedure in the beginning of 2019 for the full 2018Q4.

[gfp]

Just to be clear, there wouldn't be any blackout periods since they are purchasing under a 10b5-1 plan.  And we know they are using that type of 'safe harbor' plan because they made repurchases subsequent to quarter end but before filing their 10Q with the SEC.

[Guest longinvestor]

A comment Buffett made at the AGM in the past few years about how CEO’s get it wrong on buybacks (doing it for the wrong reason or simply getting it wrong) has me thinking if the current buyback that is WIP has been assigned to the wards as a developmental opportunity. Thinking Ted and Todd. In essence calculate Intrinsic Business Value. They are likely going to get this task for a longer time to come.

[John Hjorth]

Just to be clear, there wouldn't be any blackout periods since they are purchasing under a 10b5-1 plan.  And we know they are using that type of 'safe harbor' plan because they made repurchases subsequent to quarter end but before filing their 10Q with the SEC.

 

Thanks for pointing that out for me, globalfinancepartners,

 

But for 2018Q3 we discussed some time ago, that the new buyback scheme would not get effective untill a certain date in 2018Q3. Am I right that this date was the release date of 2018Q2 10-Q?

[gfp]

A comment Buffett made at the AGM in the past few years about how CEO’s get it wrong on buybacks (doing it for the wrong reason or simply getting it wrong) has me thinking if the current buyback that is WIP has been assigned to the wards as a developmental opportunity. Thinking Ted and Todd. In essence calculate Intrinsic Business Value. They are likely going to get this task for a longer time to come.

 

 

They were unusually specific about this:

 

"Under the amendment adopted by the Board of Directors, share repurchases can be made at any time that both Warren Buffett, Berkshire’s Chairman and CEO, and Charlie Munger, a Berkshire Vice Chairman, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined."

 

http://www.berkshirehathaway.com/news/jul1718.pdf

 

Also - because it is a 10b5-1 plan, there is nothing but set a cap for Ted or Todd to do.  The trading decisions have to be made by the broker without interference or they lose the safe harbor of the plan.

[gfp]

Yes, the amendment to the plan (removing the 1.2x rule) went into effect after the 2nd quarter earnings were released.  The first trade was actually on Tuesday, so they waited an additional day to start - for whatever reason.  But that was a one time delay.  They didn't want to look like they had material nonpublic information (which of course they always have, but they are trying their best to be "fair")

 

Going forward there are no blackout periods except the final few minutes of the trading day.  So far this quarter, they might have repurchased something like $1.7-1.9 Billion of stock.  If they moved the cap up to 218 or something like that, it would be a higher number because they would have been active on additional trading days.  If BRK stays below whatever the cap is for the rest of December, the 1.7-1.9 billion number will continue to go up by approximately $66 million per day.  That is my guess.  We'll figure out more over time.

 

Just to be clear, there wouldn't be any blackout periods since they are purchasing under a 10b5-1 plan.  And we know they are using that type of 'safe harbor' plan because they made repurchases subsequent to quarter end but before filing their 10Q with the SEC.

 

Thanks for pointing that out for me, globalfinancepartners,

 

But for 2018Q3 we discussed some time ago, that the new buyback scheme would not get effective untill a certain date in 2018Q3. Am I right that this date was the release date of 2018Q2 10-Q?

[Jurgis]

Also - because it is a 10b5-1 plan, there is nothing but set a cap for Ted or Todd to do.  The trading decisions have to be made by the broker without interference or they lose the safe harbor of the plan.

 

So for the 10b5-1 plan, they have to set an absolute price (what you call "cap") at or below which to buy and the size? And they cannot do anything fancy like relative price? And they cannot change the size either?

[gfp]

They don't have to set an absolute price.  It can be a pretty involved formula or something as long as it is laid out ahead of time and not changed later.  They can change their size up to a point.  I just don't think they are so far.  We'll see

 

Also - because it is a 10b5-1 plan, there is nothing but set a cap for Ted or Todd to do.  The trading decisions have to be made by the broker without interference or they lose the safe harbor of the plan.

 

So for the 10b5-1 plan, they have to set an absolute price (what you call "cap") at or below which to buy and the size? And they cannot do anything fancy like relative price? And they cannot change the size either?

[rb]

Yes, the amendment to the plan (removing the 1.2x rule) went into effect after the 2nd quarter earnings were released.  The first trade was actually on Tuesday, so they waited an additional day to start - for whatever reason.  But that was a one time delay.  They didn't want to look like they had material nonpublic information (which of course they always have, but they are trying their best to be "fair")

 

GFP, how do you know the days when they traded i.e. that the first trade was on Tuesday?

[alwaysinvert]

They don't have to set an absolute price.  It can be a pretty involved formula or something as long as it is laid out ahead of time and not changed later.  They can change their size up to a point.  I just don't think they are so far.  We'll see

 

Also - because it is a 10b5-1 plan, there is nothing but set a cap for Ted or Todd to do.  The trading decisions have to be made by the broker without interference or they lose the safe harbor of the plan.

 

So for the 10b5-1 plan, they have to set an absolute price (what you call "cap") at or below which to buy and the size? And they cannot do anything fancy like relative price? And they cannot change the size either?

 

They could conceivably have a stop if the market falls x% in order to favor buys in the stock portfolio, but I strongly doubt that they would bother with any complicated stuff at current cash levels. More likely they have a ceiling for the total possible buybacks in each period either via a total dollar cap and/or via a cap as a percentage of daily traded volume.

[alwaysinvert]

Yes, the amendment to the plan (removing the 1.2x rule) went into effect after the 2nd quarter earnings were released.  The first trade was actually on Tuesday, so they waited an additional day to start - for whatever reason.  But that was a one time delay.  They didn't want to look like they had material nonpublic information (which of course they always have, but they are trying their best to be "fair")

 

GFP, how do you know the days when they traded i.e. that the first trade was on Tuesday?

 

That info is in the 10-Q. Aug 7-Aug 24

[rb]

Thank you.

[gfp]

This trading day disclosure (which is not required so it's curious that Warren is telegraphing this information) is how we arrive at the theory that there is a cap price and what their average daily purchase volume is on days they are in the market.  I should add that a lot of what I post is my opinion, but it's not a totally uninformed opinion.  Earlier there were a lot of folks saying Berkshire was going to be buying hand over fist and that just didn't jibe with what Warren has said and done over the years.  If he gets some big block trades presented to him and he's not in a blackout period, he can act aggressively on those outside of this trading plan.  He probably knows where potential big blocks of stock are - but someone has to want to part with it.

 

If he can average $10 Billion of repurchases annually under this plan it is not going to make much of a difference, but it's better than nothing.  We used to get excited when Berkshire announced a $10 Billion cash acquisition!

 

Personally, if we stay below 200/b share I would love to see the company take in a ton of stock, but it would surprise me.  Painting the tape into the end of the year is much more of a Biglari thing than a Buffett thing.

[aws]

I ran some calculations to add additional perspective to market price change in Berkshire since prior quarter end and its portfolio holdings.  I used the data from the CNBC portfolio tracker and I excluded the handful of stocks under $400mm in holdings which in the aggregate are less than $1 billion total.  I attached my spreadsheet with more details but I wanted to point out a few things:

 

Berkshire's market cap has fallen much slower than the average stock it holds.  In fact, the majority of the decline since prior quarter's end was the decline in portfolio value.  Assuming a tax rate of 21%, Berkshire's portfolio has lost 11.69 in per B share value after tax, compared to the market price drop of 18.94 over the same period.  The roughly 42% of market cap weighted to the portfolio accounted for 62% of Berkshire's decline.  If you subtract out the impact of the investment portfolio then Berkshire's market cap of remaining assets dropped by 5.82%. 

 

So effectively Berkshire the operating company is 5.82% cheaper that it was on 9/30, when the average company in the S&P 500 is 13.8% cheaper.  I would have to think that heavily skews in favor of NOT buying in Berkshire over other opportunities.  Or maybe he's buying back so much that the price is propped up a bit and otherwise would have fallen closer to market average.

 

As an aside, how much do you think the market is going to overreact when they see Berkshire's enormous net loss for the quarter?  We're already at something like $25 billion after tax loss here assuming good operating earnings.  Since it seems like everything is more volatile and short-term oriented lately I could see a big drop if we are still in a weak market then, even though it is obviously old news by that point.  That might be the time the buybacks kick into high gear.

brk_declines.xlsx

[gfp]

Thanks aws.  It could be a bit worse than those numbers, of course, as we would presume that Warren continued buying certain financial stocks after quarter end.  The big quarterly mark passing through the income statement will be announced when the annual report comes out - which tends to obscure focus on the 4th quarter alone.  In any event, it will be a long time before that comes out.  Berkshire is seen as decently defensive and that is probably why it outperformed some stocks during the recent market decline.

 

I think Warren & Charlie pay a lot more attention to the valuation disconnect caused by their insurance and operating companies than the quarterly fluctuations in the stock prices of investees (most of whom are engaged in very large repurchase programs themselves).

 

Here's hoping Berkshire can find a wholly owned subsidiary to add to the collection with this recent fade in enthusiasm and uptick in financing costs for leveraged buyers.

 

I happened across a private company in Chicago called Reyes Holdings.  What a gem - would fit perfectly into BRK but why would they ever sell...

[SwedishValue]

Seems to be big volume today. Is there anything special going on in terms of options settlements or something?

 

Anyway, I added to my position after it was filed that Ajit Jain bought stock over the market. Interesting times.

[rb]

yes it is. It's witching day. A quadruple witching day to be exact.

[karthikpm]

The Barron's article & Jain's purchase probably caused the bump

[John Hjorth]

There are 4½ trading days left right now on NYSE in 2018 [December 24^th [half trading day], 26^th, 27^th, 28^th & 31^st], right?

 

- - - o 0 o - - -

 

I think I'll start updating my tool for 2018 tomorrow. Based on the thoughts posted here by globalfinancepartners, I'll add the optionality to change the percentage of daily volume bought by Berkshire from 25 percent to whatever you may personally expect between 0 and 25 percent, as a separate input variable. It shouldn't be that time consuming.

[John Hjorth]

Attached is my stab of today at reverse engineering of Berkshire 2018Q3 buybacks.

BRK_-_Calculation_of_maximum_share_buybacks_period_20180701_-_20180930_-_v1_-_20181223.xlsx