Buffett buybacks: Could Berkshire tender stock?

[John Hjorth]

I've been busy with other stuff the last few days, but I'll provide an update for 2018Q4 soon, before we will have the 10-K. That will be Saturday February 23^rd 2019, right?

 

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Next thing must be the 2018Q4 13F-HR on Friday just after market close next Friday, Friday 15^th 2019. -I can almost hear the silence around Berkshire lately! - Only 6 [six] SEC filings since last [2018Q3] 13F-HR!

 

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Tracking the volume on a continuing basis is a great idea. I'll just have to "merge" the files I already have. Personally, I have trouble imagine that the price of Berkshire will stay in "buyback territory" [whatever that specifically means] going forward for prolonged time spans - I consider it too good to think that it will actually happen. Time will tell.

 

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What are your interim thoughts about the "buyback ceiling" [maximum price for share buybacks] for 2018Q4, gents? gfp has earlier expressed and shared thoughts with us about that it would be adjusted quarterly, perhaps related in a way to the quarterly development in book value per share. [That line of thinking makes sense to me, personally.]

 

Furthermore, rb has posted earlier, that perhaps the buyback scheme is a bit more nuanced and not so simple as what the reverse engineering of the buybacks for 2018Q3 showed support for. Perhaps a larger percentage than 10 percent of average daily volume, if the market price deviates materially downwards from the buyback ceiling, like we experienced around Christmas?

 

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Daily volumes for January 2019 - just by looking at a chart - looks about similar to volumes in 2018Q4 - and I would expect Berkshire has been buying back the whole month.

 

Privately negotiated deals will continue to stay a joker until next 10-Q or 10-K.

[Guest longinvestor]

Which one is better for shareholders?

 

Co buying back aggressively, say $10 B over the past quarter? Then wait for another opportunity to buy aggressive ly?

 

“A little” like a couple of billion a quarter for 10 years?

[gfp]

Hard to say what is better for shareholders.  But Berkshire isn't going to repurchase stock aggressively unless it gets really cheap.  The current plan takes in 5-10% of the average daily volume on days the stock is below a cap price. The current plan takes in 10% of ADV as a target, but actually was something like 11% on the B-shares for the 11 actual days they were active.  Harder to calculate on the A-shares because they traded at a premium to the B's during the 7/7-7/24 period, and may not have had the same cap.  It allows them to be active during what would otherwise be blackout periods and it accomplishes Buffett's goal of not manipulating the share price (much).

 

If he got some big blocks of stock offered to him he would probably take them.  But those seem infrequent, so this slow dribble of - at best - less than $4 Billion per quarter will probably be all we get.

 

I estimate Q4 repurchases were somewhere between $1.5 Billion and $2.7 Billion $2 Billion and $3.5 Billion, depending on how they figure the cap price.  I would expect that they continued share repurchases subsequent to quarter end as well, which we will be able to tell when they file the 10K with a share count as of mid-Feb.

 

 

Which one is better for shareholders?

 

Co buying back aggressively, say $10 B over the past quarter? Then wait for another opportunity to buy aggressive ly?

 

“A little” like a couple of billion a quarter for 10 years?

[Guest longinvestor]

In the case of Berkshire Hathaway price is arguably influenced more by disclosure that they have been buying via SEC filing than the percentage of ADV that they actually bought. The stock price has not moved much no matter whether they bought 5% or 25% over the past 4 months. It’s not moved because of buyback volume at least in one quarter.

 

From all answers provided by Buffett on this subject they are likely to be opportunistic, aggressive but always relative to what other (better) opportunities they are presented with at any given point in time. Buffett has made some comments of late that they are not currently being offered greater deals. I get the sense that buybacks are always plan B for Buffett and Munger. For the next guy it could well be plan A.

[John Hjorth]

Attached is the file I posted on December 29^th 2018, now updated with the last trading day in 2018, December 31^st 2018.

 

I have [mechanically] projected the reverse engineering outcome from 2018Q3 to 2018Q4 [i have no other reasonable fixpoints as of now - the information will be available in the 10-K that we will see soon].

 

The file indicates a bit north of USD 4 B in buybacks [~ USD 4.2 B] for 2018Q4.

 

The file also indicates a quarterly volume of USD 75 B, indicating monthly volume of USD 25 B for the quarter at an average volume based stock price of 207.66. [Elaboration: If the buyback threshold was 230, the broker running the buybacks would be buying 10 percent of everything every day, then indicated in that case, that the buybacks would be USD 7.453 B - ten times that figure is ~ USD 75 B for the quarter.]

 

Still no bling in the file.

BRK_-_Calculation_of_maximum_share_buybacks_period_20181001_-_20181231_-_v1_-_20190210.xlsx

[rolling]

Upon reading this thread, some points make me raise a few questions:

1) 208 price cap: why would the cap have stayed the same? My guess is he updates the number every quarter, either in an automatic fashion or not. My guess would be a roughly 2% increase every quarter, which would amount to an 8-9% IV increase every year

 

2) 10% volume cap: why should it be static? It would be much more Buffett like say: 0-10% discount to IV, buy up to 10%, 10-15%, up to 15, 15-20, up to 20%, ovee 20% discount go all in to the 25% limit.

 

I guess we might soon know some of the answers.

[gfp]

Yeah we don't know if its a static / manually adjusted price cap on the plan.  We'll probably be able to reverse engineer the plan rules after a few more quarterly disclosures.  It could very well be that the cap is based on a multiple of last reported BVPS.

 

Warren would be willing to buy big blocks of shares outside the broker-executed plan when he's not in a restricted period.  For the automatic plan, he really doesn't want to affect the trading price of the stock much - or establish any type of "floor."

 

Upon reading this thread, some points make me raise a few questions:

1) 208 price cap: why would the cap have stayed the same? My guess is he updates the number every quarter, either in an automatic fashion or not. My guess would be a roughly 2% increase every quarter, which would amount to an 8-9% IV increase every year

 

2) 10% volume cap: why should it be static? It would be much more Buffett like say: 0-10% discount to IV, buy up to 10%, 10-15%, up to 15, 15-20, up to 20%, ovee 20% discount go all in to the 25% limit.

 

I guess we might soon know some of the answers.

[John Hjorth]

aws posted this in the "General News" topic:

 

Net buys were only about 1b for the quarter, and unless they got lucky and bought RHT before the IBM news then most of that is probably just a merger arb.  Not exactly swinging for the fences on one of the worst quarters in recent memory.  I wonder if he was expecting it to get a lot worse, or if he was spending all his funds on Berkshire stock.  Berkshire did do relatively well compared to the market up until the start of the year, so maybe he was buying a lot then but has been locked out lately.

 

I was surprised to see the number mentioned in this post by aws for net buys. However it's true. Attached is my estimation. [EOP 2018Q3 prices used for positions liquidated in 2018Q4, EOP 2018Q4 prices for the rest.]

BRK_-_Estimated_capital_allocation_in_listed_stock_investments_2018Q4_-_20190216.pdf

BRK_-_Estimated_capital_allocation_in_listed_stock_investments_2018Q4_-_20190216.xlsx

[alwaysinvert]

There was some discussion about implications for capital allocation possiblities in light of the latest 13F. Some people drew the conclusion that this makes large market buybacks more likely. I disagree with that - it's hard to see why that would meaningfully move the size of market buybacks since funds are far from scarce anyway.

 

However, I would contend that the possibilities of a tender buyback have materially increased from the recent dearth of stock purchases and acquisitions. Soon enough there will be no other reasonable way of allocating the excess capital. Except the dreaded taxable event of a dividend, that is. 

[AdjustedEarnings]

I'm going to go out on a limb and suggest that we should expect a fairly big buyback for the quarter ($5 bn +, maybe even $7bn), given the following fact pattern:

 

1. First quarter: S&P -0.76%, net equity purchases of $10.5 billion

2. Second quarter: S&P 3.43%, net equity purchases of $1.3 billion

3. Third quarter: S&P 7.71%, net equity purchases of $12.6 billion, buyback $0.9 billion

4. Fourth quarter: S&P -13.52%, net equity purchases of $0.9 billion (the lowest of the year at the most attractive point and it's not like they didn't have cash).

5. Much of the additions during the year were banks and Apple. These fell even more than the market in Q4. None of the major holdings were materially reduced (except to remain below 10%, etc.) so the attractiveness of these to WEB seems to continue. Yet, they were not purchased even at lower prices. In fact, it was the lowest quarter for net equity purchases. So there must've been an alternative to get the cash out.

6a. Stock was below 3Q18 buyback levels. One could question, does the buyback threshold come down because of the fall in the market value of the portfolio. It's possible, but nothing changes on a look-through earnings basis. From that view, buying back BRK becomes a better way (than purchasing stocks) to increase exposure to the same portfolio.

6b. Ajit Jain purchased $30mm of stock for his personal account, which would seem to support 6a. Jain is also on the board and, hence, familiar with WEB's valuation and buyback level.

7. Daily volume considerations would easily allow a buyback of $5-$10 billion.

 

If BRK didn't buy back and just let cash build and build despite the market fall and the flagging share price, we'll have to revisit our assumptions on long-term ROE. On the other hand, if they buy back a lot of stock, it's a clear indication that they think this is the best large cap opportunity out there (and JPM?). So there... that's what I think will happen. We'll find out soon enough.

 

Also, even though remote, I think the possibility of a dividend is higher now, especially if it turns out they haven't bought back much. Otherwise cash levels will become simply unmanageable/ridiculous and we'll have a permanently low ROE due to the drag. In a regular recession, they could not get $100 billion invested.

[Guest longinvestor]

A big factor in buying back is the market co-operating with Berkshire by offering the stock at  (well) below intrinsic value. If Buffett tips his hand about the new price he’s willing to buy, the market will immediately close the door to buybacks. Exactly what happened at 1.1x and 1.2x BV. And the buyback is meant to gobble up some $200 B over the next decade. They need the buying opportunities for a long time to come. If “a little “ or whatever that means is the way to get more opportunities that’s likely what they do. On the other hand, they are seldom known to waver when they see good opportunities, the wheelbarrow thing. We’ll see soon enough

[AdjustedEarnings]

Extremely light buyback!

 

$BRKB repurchased $418 million worth of $BRKA and $BRKB and another $14 million through Feb 14.

[John Hjorth]

Post by gfp in "Annual Letter" topic just short time ago :

 

Only $417 million in share repurchases in Q4.  Only active from 10/11-10/18 and 12/13-12/24 - so much for figuring out their plan!  Further, they only repurchased class A shares during the fall culminating on Christmas Eve - not what I would have guessed.

 

page K-29 for those interested.

It makes no sense to me, what has been going on with the buybacks in the days just before Christmas. B-shares - the most liquid of the two classes - were bought at an average price of 205.09 in the period October 11^th - 18^th, and none were bought in December, where the share price for the B went below ~205 at around December 17^th, and even at few days were below 200!

 

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Cash is being built up at parent company level, EOP 2018Q4 USD 26.394 B. Why? [p. K-111.] Perhaps needless to say that I'm in the same camp as alwaysinvert with regard to dividends - well, now I "said" it.

[aws]

I guess we shouldn't be too surprised that he wasn't that active during this dip, as it happened and was over so quickly. If Buffett sprang into action on every 15% dip, then he would never have any cash left for when things get really bad.  I guess it was just the wrong type of dip.  If prices had stabilized at a lower level then he probably would have been a much bigger buyer.

 

My guess is he is still waiting for that super elephant that will cap his career, and he wants a huge amount of capital for that.  Buybacks permanently take away capital even if it enhances per share intrinsic value, while cash stored in open market purchases can be sold to help pay for that super deal.

 

The longer stocks and private business values stay elevated the less likely he will make a big deal.  I guess he will just continue to spend dribs and drabs to avoid building up cash absurdly high, but won't be aggressively buying back shares.

[Guest longinvestor]

I guess we shouldn't be too surprised that he wasn't that active during this dip, as it happened and was over so quickly. If Buffett sprang into action on every 15% dip, then he would never have any cash left for when things get really bad.  I guess it was just the wrong type of dip.  If prices had stabilized at a lower level then he probably would have been a much bigger buyer.

 

My guess is he is still waiting for that super elephant that will cap his career, and he wants a huge amount of capital for that.  Buybacks permanently take away capital even if it enhances per share intrinsic value, while cash stored in open market purchases can be sold to help pay for that super deal.

 

The longer stocks and private business values stay elevated the less likely he will make a big deal.  I guess he will just continue to spend dribs and drabs to avoid building up cash absurdly high, but won't be aggressively buying back shares.

 

 

+1. This is a most plausible scenario. It'd be silly if he drained the cash, albeit for buying back at attractive prices and then has to raise large amounts of capital later. At unfavorable conditions! It could put them "at the mercy of the kindness of strangers" something they are foresworn against in the fortress that is Berkshire.

[wisowis]

So in the beginning of the letter he says he is changing how the value of Berkshire is reported in his letters.

 

Long-time readers of our annual reports will have spotted the different way in which I opened this letter. For

nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s

now time to abandon that practice

 

He then goes on to say this about buybacks:

 

 

When a company says that it contemplates repurchases, it’s vital that all shareholder-partners be given the

information they need to make an intelligent estimate of value. Providing that information is what Charlie and I try to

do in this report. We do not want a partner to sell shares back to the company because he or she has been misled or

inadequately informed.

 

Call me crazy, but that sounds to me like reluctance to buy back in size when he was providing investors with per-share book value as the metric to be used to calculate intrinsic value.

 

I think this is him telegraphing that he is now open to large buybacks, now that potential sellers have been "warned".

 

[Gregmal]

I guess we shouldn't be too surprised that he wasn't that active during this dip, as it happened and was over so quickly. If Buffett sprang into action on every 15% dip, then he would never have any cash left for when things get really bad.  I guess it was just the wrong type of dip.  If prices had stabilized at a lower level then he probably would have been a much bigger buyer.

 

My guess is he is still waiting for that super elephant that will cap his career, and he wants a huge amount of capital for that.  Buybacks permanently take away capital even if it enhances per share intrinsic value, while cash stored in open market purchases can be sold to help pay for that super deal.

 

The longer stocks and private business values stay elevated the less likely he will make a big deal.  I guess he will just continue to spend dribs and drabs to avoid building up cash absurdly high, but won't be aggressively buying back shares.

 

I think if this is the case its even more troubling. Translated, this essentially means he is putting his legacy and the "exclamation mark" on his career ahead of easy and obvious, not to mention more traditional method of creating per share value.

 

On one hand he thinks valuations are excessive(which could also just be an excuse for making some mistakes), yet if this is the case what is the need for all the cash if you think your own equity is cheap? Further, I saw a comment here or maybe in the annual letter thread about "he's shouldn't just buy the dip on every 15% correction". Well, first off, if you know the value of what you are buying, this is irrelevant, and second, how many 15% corrections have we had in the past two decades? And where would one be had they bought BRK or any other number of market proxies during those drawdowns? Just seems like an awful lot of excuse making. Are shareholders really comfortable with this guy, and his track record of late, spending $50B-$75B on an acquisition???

[rb]

Are shareholders really comfortable with this guy, and his track record of late, spending $50B-$75B on an acquisition???

Yep!

[alwaysinvert]

Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at

prices above book value but below our estimate of intrinsic value.

 

I guess the question is still exactly how that will be achieved but I interpret that sentence as being very close to a promise.

[aws]

I think if this is the case its even more troubling. Translated, this essentially means he is putting his legacy and the "exclamation mark" on his career ahead of easy and obvious, not to mention more traditional method of creating per share value.

 

I don't know that I would go that far.  It's a balance between buying back some of your own shares for a small discount against the hope of a future deal at what would hopefully be a much bigger discount.  A great acquisition could add substantially more to the long-term EPS than a few percent in buybacks.  However, as the years grind by without an acquisition the drag from the underperformance of cash means the acquisition in the end would have to be all the more valuable to justify the losses by waiting.

 

At this point, at least in hindsight, he's probably waited too long.  It's hard to imagine a $50B acquisition today having been better than just buying back $50B of stock over the past five years.  The gap between their return on equity and the return on cash has been like 9% a year, so even if they buy something returning 12% tomorrow, the few lost years of compounding will take a very long time to make up.  But no one knew in advance that this business cycle would go on this long, that M&A valuations would stay so high, or that some sweetheart deal wouldn't just fall into his lap.

 

Overall, I'm much more comfortable with him being a little too conservative, than to go down the value destructive path of much of the market with buybacks and M&A regardless of the price. 

[John Hjorth]

... I guess we shouldn't be too surprised that he wasn't that active during this dip, as it happened and was over so quickly. If Buffett sprang into action on every 15% dip, then he would never have any cash left for when things get really bad.  I guess it was just the wrong type of dip.  If prices had stabilized at a lower level then he probably would have been a much bigger buyer. ...

 

aws,

 

Have you studied any of the data provided in this topic?

[aws]

... I guess we shouldn't be too surprised that he wasn't that active during this dip, as it happened and was over so quickly. If Buffett sprang into action on every 15% dip, then he would never have any cash left for when things get really bad.  I guess it was just the wrong type of dip.  If prices had stabilized at a lower level then he probably would have been a much bigger buyer. ...

 

aws,

 

Have you studied any of the data provided in this topic?

 

What specifically are you referring to?  I've skimmed the topic and seen a lot of speculation about maximum repurchase amounts, but that's clearly not been any limiting factor for them.  No one really knows exactly what Buffett is going to do and when.  The most useful data regarding buybacks has been the actual reports, and that shows that he's had little interest in buying aggressively. 

 

To me, it made sense, and I had contributed some spreadsheets showing that Berkshire market value during the dip was dropping much slower than the market as a whole, making repurchases less attractive than open market purchases of additional portfolio securities.  Then we got the 13f and saw he didn't really buy anything there, so one had to wonder if it was him putting a floor under the price with a lot of repurchases.  And today we got the answer that no, he wasn't buying much of anything in Q4.  YTD that trend has reversed and Berkshire has underperformed a lot, but now everything else is also more expensive.  Berkshire swung down less, and rebounded less, probably never putting IV that far below the bounds he would want for big buys.

 

All we know for sure is that he doesn't like cash getting too much more than $100B, so he will begrudgingly buy stocks or repurchase shares if he can't find a better use for the capital.  He likes Berkshire well enough in this range that it's been in to repurchase some, but has no desire to buy aggressively.  Maybe he would have bought more of everything if prices stayed 15% down for more than a week, maybe he's waiting for 20-30% discounts to do that. 

[John Hjorth]

aws,

 

I'm specifically referring to the attachment in this post of mine, and to gfp's very detailed elaboration in several posts in this topic about all the details in a "safe harbour" buyback plan.

 

To me, this can be analyzed data driven - which I have done - here, in this topic. If you look at the data, Berkshire could have bought B shares for USD 1.9 B below 205 in December 2018 [like it - at least - did in a part of October 2018]. [<- The data for what I'm writing here are in the attachment mentioned above.]

 

Why did that not happen?

 

To me, the answer to that is not about some "general considerations", but about data analysis, combined with straight thinking based on logic, taking existing and ruling regulation into consideration.

[gfp]

This was surprising to me and it is a choice Warren made.  In October they were only active for 6 days, buying both classes of shares at around $30.6 million per day on average.  Then they stopped on October 19th - with prices the same as when they were buying.  And they stayed out fo the market the rest of October, when prices declined as low as 197.29 / b share. 

 

Then they started buying again 12/13 through Christmas Eve, which is 8 trading days.  Surprisingly they only purchased A shares during this period, at an average of about $29.2m worth per day.  Why on earth they would not purchase B - shares during this period is a mystery to me, unless these were purchased in blocks that were offered directly to Berkshire and this is just the number that happened to be offered. 

 

It seems like there was not an active safe harbor 10b5-1 plan during most of the quarter, or if there was it had a lower cap price after 10/18 and didn't trigger any purchases afterwards.  The December purchases seem like they were made outside of the plan, if one existed after 10/18.

 

I suppose Warren knows market participants will try to reverse engineer his buying and it could end up, over time, with a situation similar to the 1.2x rule that kept him from being able to do much.  So he changes it up a bit.

 

It could also be that he wanted to get the Annual Report out and now he won't feel as bad about 'taking advantage' of exiting shareholders  - his former partners.  But that seems like wishful thinking.  We'll see over time.  Maybe he got bearish like everyone else in December and thought better opportunities would come in 2019.  Not very Buffett-like, but we saw Apple freeze up on buying as well.  People seemed to get spooked.

 

Why on earth wasn't he buying any shares on 12/26?  I can only guess that it's because none were offered to him with a phone call, and there was no active 10b5-1 plan 'automatically' buying on Berkshire's behalf (or there was one but the cap price was lower).

 

We'll see..  I was certainly off in my expectations

[Viking]

So in the beginning of the letter he says he is changing how the value of Berkshire is reported in his letters.

 

Long-time readers of our annual reports will have spotted the different way in which I opened this letter. For

nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s

now time to abandon that practice

 

He then goes on to say this about buybacks:

 

 

When a company says that it contemplates repurchases, it’s vital that all shareholder-partners be given the

information they need to make an intelligent estimate of value. Providing that information is what Charlie and I try to

do in this report. We do not want a partner to sell shares back to the company because he or she has been misled or

inadequately informed.

 

Call me crazy, but that sounds to me like reluctance to buy back in size when he was providing investors with per-share book value as the metric to be used to calculate intrinsic value.

 

I think this is him telegraphing that he is now open to large buybacks, now that potential sellers have been "warned".

 

Wisowis, i think you have nailed it. In the past Berkshire has pretty much NEVER bought back much stock; even when the shares were dirt cheap. However, i think this will now change in the future. More importantly, i think Buffett finally is ok with Berkshire making significant purchases of shares. But for this to happen, Buffett first felt he needed to do a couple of things:

1.) remove the handcuffs he has self imposed: In the past Buffett has said BRK might buy back stock when it trades at a certain price level to book value (1.2 then 1.4). In this letter he shreds this commitment. He says BV is no longer a good measure to use when valuing BRK; this is a massive change for Buffett and BRK. Now Berkshire will buy shares when they feel they are cheap and shareholders will find out when quarterly results are published; no longer being constrained to only re-purchase when the stock drops below a pre-specified price to book amount is a big benefit to BRK.

 

And what is cheap? Whatever Berkshire decides.

 

2.) provide current shareholders with an updated way to properly value the company: he spends a great deal of the current letter doing this and he lays it out quitewell. I am sure there is a reason for this.

 

Buffett did not repurchase in Q4 because he first wanted to communicate Berkshire’s new philosophy in the Feb shareholder letter, which was probably written before the Dec meltdown. Buffett always looks longterm; the stock will get cheap again and now he will have no self imposed constraints on when to buy back shares.

 

And, perhaps most importantly, Buffett has now gone out of his way to ‘warn’ or ‘inform’ investors. If they sell and Berkshire subsequently buys back a big amount of shares and this leads to a higher share price they cannot blame Berkshire for not being transparent.