Buffett buybacks: Could Berkshire tender stock?

[wabuffo]

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:

 

Perhaps it is just a matter of Buffett needing to set the stage properly:

"You should be aware that, at certain times in the past, I have erred in not making repurchases. My appraisal of Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds.... We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report"

 

Buffett wanted to make sure all shareholders had the same information from his annual letter before doing any share repurchases ... in March, 2000! 

 

It's the same siren song for almost 20 years! 

 

I am afraid he's no Henry Singleton.

 

wabuffo

 

[vinod1]

It is a mystery to me as to why investors spend so much time on the question of buybacks both at Berkshire and many other companies.

 

Say Berkshire retires 20% of shares outstanding at 75% of IV over the next 5 years - a prospect I think that would seem to excite a lot of shareholders. This would result in about 6.25% increase in IV over the 5 years or about 1.25% annually.

 

Do shareholders really get that excited by the prospect of an extra 1.25% annual increase in IV? It is about the the volatility that the stock experiences intraday.

 

Of course, it is better to have that 1.25% rather than not having it. But is it really that big of a deal that so much attention gets paid?

 

There are cases where it makes a real difference. Like AIG in 2011/12 timeframe when a case could be made that it would be able to retire 30-40% of shares outstanding at 50-60% of IV in a relatively short period of time.

 

No disrespect meant to anyone. A lot of smart investors here and I might be missing something that I cannot wrap by head around.

 

Vinod

[wabuffo]

It is a mystery to me as to why investors spend so much time on the question of buybacks both at Berkshire and many other companies.

 

From March 8, 2000 (day when Buffett first mentioned that he would consider making repurchases) vs AutoZone (serial repurchaser).

 

http://i67.tinypic.com/jfw6s1.jpg

 

Snowball...man, snowball!

 

wabuffo

[Viking]

It is a mystery to me as to why investors spend so much time on the question of buybacks both at Berkshire and many other companies.

 

Say Berkshire retires 20% of shares outstanding at 75% of IV over the next 5 years - a prospect I think that would seem to excite a lot of shareholders. This would result in about 6.25% increase in IV over the 5 years or about 1.25% annually.

 

Do shareholders really get that excited by the prospect of an extra 1.25% annual increase in IV? It is about the the volatility that the stock experiences intraday.

 

Of course, it is better to have that 1.25% rather than not having it. But is it really that big of a deal that so much attention gets paid?

 

There are cases where it makes a real difference. Like AIG in 2011/12 timeframe when a case could be made that it would be able to retire 30-40% of shares outstanding at 50-60% of IV in a relatively short period of time.

 

No disrespect meant to anyone. A lot of smart investors here and I might be missing something that I cannot wrap by head around.

 

Vinod

 

Vinod, for me what a company does with its retained earnings is a super important part of the decision to own shares. Berkshire carrying +$100 billion in cash (more than 20% of its market cap) every year is simply not an effective use of cash and Buffett has said as much. I would love for them to demonstrate they are serious about using meaningful amounts of cash to buy back shares (not all the time but certainly at times when the shares get cheap and they are sitting on too much cash with few opportunities in sight... like perhaps now).

 

If this process starts when Buffett is still around then we should be able to safely assume it will continue when Buffett is gone. In my mind this also makes the decision easier to be a long term shareholder (post Buffett).

[bennycx]

This discussion exemplifies group-think, over-analyzing the situation and what investors want rather than what is logical.

Put yourself in Buffett shoes and you will realize:

1) He thinks there is more value in some large banks and wholly-owned elephant acquisitions

2) He doesn't think Berkshire's intrinsic value is at a steep enough discount

 

For large wholly-owned acquisitions, incentives are against Buffett as ego-centric CEOs like to say they're a CEO of a big company, rather than a head of a subsidiary of Berkshire.

Therefore I still stand by my prediction of the "not impossible" chance of a way for Buffett to get around the 10% limitations of big banks, likely to be an agreement with the SEC or still a minority interest in banks he might deal less with e.g. USB

[Cigarbutt]

Follow-up to replies #351-3.

I like wabuffo's example but the buyback does not explain all for AutoZone.

Potentially interesting to look at the math behind the decision and the compounding effect.

 

(1+%TR) = (1+%ΔREV)*(1+%ΔNPM)*(1+%Δ of multiple)*(1+%reinv. div. impact)*(1+%buyback impact as a function of a lower share count)

The compounding impact is related to the size (continuous or opportunistic) of the buyback and to the discount to IV.

 

One can play with numbers (backward and forward looking).

For BRK, there are a few reasonable assumptions and perhaps a major conceptual flaw.

 

For instance, looking back, if BH had used 20B of "excess" cash per year for the last four years in order to complete a buyback:

instead of BRK.B at 204 and cash/equiv./ST at 112B,

one gets BRK.B at around 260 and cash/equiv./ST at 32B

 

What do you prefer?

 

If you think the old man has lost it and that his deviation from the fully invested mentality is no longer appropriate, you may prefer the second hypothetical scenario.

 

If you think that the Capital Allocator in chief has been considering all opportunities in a rational way, you may prefer the real scenario and see how getting towards the 150B mark with the present BRK valuation has made the job more difficult.

 

Last time I saw an interview with him, he still showed the same charm and folksy nature but I still deeply respect the man and his focus, to the same degree I would respect a man carrying a fully loaded gun. I still don't think he will let go of the cartridges so easily.

[shalab]

I get what wabuffo and others are saying, also the P/B metric anchored the stock. The stock was never reached intrinsic value in the past decade.

 

On the plus side, it has allowed me and my family to acquire a great business at reasonable prices. I think there will be significant buy back in the coming years. If the business expands further with other acquisitions it will be great!

[Guest longinvestor]

I get what wabuffo and others are saying, also the P/B metric anchored the stock. The stock was never reached intrinsic value in the past decade.

 

On the plus side, it has allowed me and my family to acquire a great business at reasonable prices. I think there will be significant buy back in the coming years. If the business expands further with other acquisitions it will be great!

+1 couldn’t have expressed myself better. I have bought for myself and others pieces of this fortress for always less than it’s worth. Couldn’t have timed it any better given these are our saving years. Results have already been satisfactory and here’s hoping for that to get to the quite satisfactory level.

[scorpioncapital]

It is a mystery to me as to why investors spend so much time on the question of buybacks both at Berkshire and many other companies.

 

From March 8, 2000 (day when Buffett first mentioned that he would consider making repurchases) vs AutoZone (serial repurchaser).

 

Snowball...man, snowball!

 

wabuffo

 

Also notice the 8 year period of zero return before the shoot-up. People want constantly up. They will be disappointed (unless it's some sort of inflationary snowball, but then up will be just keeping up)

[alwaysinvert]

It is a mystery to me as to why investors spend so much time on the question of buybacks both at Berkshire and many other companies.

 

Should probably not be all that much of a mystery when you click on a thread named "Buffett buybacks: Could Berkshire tender stock?"

[Dynamic]

I used to think that there was a cash drag at Berkshire, but that it would be invested eventually at good rates of return.

 

Now, I think that there is no cash drag at times like these, because the amount of uninvested cash is remarkably close to float, an offsetting liability, albeit one that does not need to be paid back for many years as it would decline, in the worst case, at about 3% per year.

 

So in normal times, Berkshire's net worth is approximately fully invested and Book Value tends to compound at about 9-11% per year.

 

In times of market panic, where capital is in short supply, Berkshire then tends to spend a lot of the float-funded cash very rapidly on equities, and favourable preferred and warrants, taking advantage of float leverage to juice the returns without a risk of a margin call (as they did for almost the entirety of the 1970~1996 period when they could find many bargains in the stock market that would move the needle). Their credit rating also allows them to take on a modicum of debt if necessary to fund an extra large acquisition, at very cheap rates, while maintaining their $20bn liquidity cushion, and the firm's enormous cash flow will pay off such debt in short order.

 

This seems appropriate when it's no longer possible to operate a deep-value portfolio of small cap bargains, and for this phase of its life, now as a mega-conglomerate, where Berkshire is hoping to moderately out-pace the SP500TR each decade, with lower risk, I'm happy with it.

 

To be clear, 2018 was not a serious bear market ripe for massive investments. The market barely fell below the levels at which they closed 31/12/2017 (itself the end of a boom year in the markets), having been flat to falling in Q1, having risen sharply in the 2nd and 3rd quarters, then falling back close to 20% in the 4th quarter to leave the market about 4-5% below where it started 2017 (and 4-5% lower than a pretty high level, is still high). Prices of a lot of things got pretty expensive in Q3, and while a few names went on sale at prices that we small investors could jump at, most large caps were not deeply undervalued for very long at all, so Berkshire had very little time to accumulate significant positions at compelling prices, unlike some private investors. If the S&P index since 2010 or so has returned rather more than the growth in the businesses, it would require quite a significant drop, to bring relative values back to 2010 levels on average.

 

I'm thinking there's a good chance of at least a moderate recession in the next year or two, possibly even out as far as 2022, though it won't stop me buying when I think things are well priced. If market prices were to fall sufficiently in the next 2-3 years, I could see Berkshire deploying some seriously significant amounts of its float-funded cash. Berkshire needs a sustained reduction in general prices to deploy such large sums with a high margin of safety, and some point in the next 2-4 years might very well provide such an opportunity.

 

As to buybacks, sure, I think there could a reasonable amount coming soon, probably keeping cash fairly close to float when combined with purchases of other stocks. But I don't think the time of large 'elephant' acquisitions or sweetheart financing and reputation-lending deals has passed (like BAC and GS warrants/preferreds that pay off handsomely after the Global Financial Crisis). But I think it may take a while for the private equity bubble and general stock market valuations to play out and offer decent chances of such opportunities.

 

In the meantime, Berkshire's Intrinsic Value continues to offer more than acceptable growth, and the stock appears to remain almost permanently valued at a fair to good discount to IV, so I'm very happy to keep it as a mainstay of my portfolio and usually my default "far better than cash with a modest downside risk" option for new funds that I accumulate unless something particularly promising appears on my radar. Even if Berkshire were to drop 10-15% after I park my cash there, it's likely to be a short-lived drop, and otherwise I'm likely to earn around 10% annualised while waiting for my next high conviction opportunity (e.g. something without about 40-50% margin of safety).

[John Hjorth]

Carrying a post by obtuse_investor over here from the "Annual Letter 2018" topic:

 

To all who are disappointed in the buyback volume last quarter: please be patient.

 

Buffett has been playing a multi decade game; and he is still playing it. He isn’t going to let his mortality stop him. ...

 

 

[gfp]

Some color on the decisions made in Q4-

 

https://www.cnbc.com/2019/02/25/buffett-says-he-was-close-to-making-a-very-large-acquisition-in-the-4th-quarter-but-it-fell-apart.html

[John Hjorth]

Thank you for sharing, gfp,

 

To me, this explains a lot of what we have discussed here on CoBF within the last two weeks about Berkshire's capital allocation. An elephant in sight, that got away, in short. Just too bad - one cannot win them all.

[cubsfan]

Some color on the decisions made in Q4-

 

https://www.cnbc.com/2019/02/25/buffett-says-he-was-close-to-making-a-very-large-acquisition-in-the-4th-quarter-but-it-fell-apart.html

 

I love this guy:

 

--When pressed for further details on the mystery deal, Buffett says, "I'll give you a hint. It's on this planet."

[SwedishValue]

I -really- feel that someone asking Mr. Buffett about the possibility of a tender offer would be justified. It is a matter in which his personal view on the matter can have huge implications for an outsider trying to value Berkshire. It is possible that he believes a tender offer would be unjustifiably "coercive", potentially luring retail investors into tendering stock at a price that looks like a good deal but really is a much better deal for continuing shareholders. It is also possible Buffett would approve of a tender, but find the likelihood of it happening to be tiny for different reasons. It is also possible that Buffett actively considers it an option, among others, for deploying excess capital.

 

Am I alone in thinking this question deserves more attention than the usual questions regarding GE/KHC/KO/AAPL/Bitcoin? To me, depending on the answer given by Buffett to the above question, I would alter my personal valuation of Berkshire by several % (ergo, if he believes a tender offer immoral, I would increase the likelihood of Berkshire ending up with 200+ BN in cash to be much higher than if he communicated that he believed a tender offer both is possible and reasonable to happen at some point).

 

How can we get this question across to Mr. Buffett?

[Spekulatius]

Thank you for sharing, gfp,

 

To me, this explains a lot of what we have discussed here on CoBF within the last two weeks about Berkshire's capital allocation. An elephant in sight, that got away, in short. Just too bad - one cannot win them all.

 

Yes, the CoBF lynch mob can put the pitch fork back into the shed. It’s too bad that he couldn’t fire off the elephant gun and he missed the opportunity to add to equities, but things can happen. Warren will now more likely return money to shareholders via buybacks unless he has another elephant in his crosshairs, which seems unlikely in the near term.

[rb]

Must have been some elephant if he stopped buying while sitting on 100+ billion in cash.

[AdjustedEarnings]

Price is below $200 again. I can almost imagine them buying...$300k of stock today... sarcastic obviously. But point being, I doubt we're going to have any large buy backs this quarter. What do you all think?

[alwaysinvert]

Price is below $200 again. I can almost imagine them buying...$300k of stock today... sarcastic obviously. But point being, I doubt we're going to have any large buy backs this quarter. What do you all think?

 

Well, we know that there weren't any up to February 14, so even if they are buying hand over fist after that, the total amount for the quarter is unlikely to be impressive.

[John Hjorth]

Price is below $200 again. I can almost imagine them buying...$300k of stock today... sarcastic obviously. But point being, I doubt we're going to have any large buy backs this quarter. What do you all think?

 

Well, we know that there weren't any up to February 14, so even if they are buying hand over fist after that, the total amount for the quarter is unlikely to be impressive.

 

Personally, I'll mentally settle with this. -What are the alternatives?

 

1. To lever your Berkshire position, or

2. To sell your Berkshire position [whole, or partly].

 

None of those alternatives have any appeal to me personally, compared to just holding on.

 

- - - o 0 o - - -

 

Are we getting played? [in the meaning: As continuing shareholders.] Personally, I've been through the whole emotional spectrum, from the release of the 13-F/HR to the 10-K. Today, my conclusion is, that we've not been. The whole line of Berkshire communication for the year end 2018 has to me been orchestrated to perfection, ending up with the interview with Ms. Quick early Monday morning [ pre market opening] after the release of the 2018 10-K Saturday in the weekend up to that particular Monday.

 

Mr. Buffett has - and will always have - an informational advantage, compared to us as Berkshire shareholders.

[aws]

I think there a three important factors to keep in mind when determining if Buffett will be making buybacks:

 

1. Berkshire's absolute price

2. Berkshire's price relative to the market

3. Berkshire's intraday book value (as adjusted for MTM gains and losses in their portfolio)

 

Numbers 1 and 3 are both trying to get at the same thing - a calculation of discount to intrinsic value, while number 2 affects the attractiveness of Berkshire vs. other opportunities.  I think too many people ignore number 3.  While a sharp selloff in the market won't have much of an impact on the IV of Berkshire's operating companies, a buyback looks like less of a good deal if Berkshire is off 10% while its portfolio is off 20%.  That was more or less the situation in Q4.  On an absolute basis it was getting cheaper, but less so relative to the market and further reduced by declines to its portfolio in excess of market losses.

 

His buybacks in August were at an average price of about 5% above the 1/1/18 price, the S&P 500 total return index was about 7% above the starting value for the year, and Berkshire's portfolio was worth about $219b (25b more than today).  So even though the absolute price of Berkshire is 4% cheaper today than his average purchase in August, the after tax adjustment to their equity portfolio results in a 4% lower book value than back then. 

 

So then you're left with only the operating earnings since then which make Berkshire maybe 2% cheaper on an absolute basis.  Also, on a relative basis the S&P 500 TR index is about 4.6% above 1/1/18 today and Berkshire is about 1% above, so on that basis too Berkshire is about 2% cheaper than August buybacks.  With the combination of those factors, and the loss of that elephant which might have held back purchase in Q4, I would expect higher repurchases today than Q3.  How much higher though I have no idea.  We don't have any evidence that he intends to devote material cash to buybacks.  $10b would be great, but I would expect 1.5-2b and hope to be surprised on the upside.

 

 

[John Hjorth]

aws,

 

It' still beyond my comprehension how you since July 17^th 2018 still have your bullet #3 in your considerations, latest based on the following in the 2018 Berkshire Shareholder Letter, p. 12:

 

Charlie and I do not view the $172.8 billion detailed above as a collection of ticker symbols – a financial dalliance to be terminated because of downgrades by “the Street,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.

 

What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning about 20% on the net tangible equity capital required to run their businesses. These companies, also, earn their profits without employing excessive levels of debt.

I'll let it go from here onwards.

[aws]

Of course I know that he considers more than just the price of the securities in his portfolio when determining the value, but it would be crazy to assume he ignores it completely when deciding whether to buyback Berkshire versus apply the cash to another opportunity (like buying more shares in the portfolio companies). Taken to an extreme, if Berkshire was flat and his holdings were down 50%, it would be crazy to assume he would ignore that and buyback Berkshire stock.  Berkshire is almost 40% the equity portfolio, so every dollar in repurchases is like allocating 40 cents to the equity portfolio and 60 cents toward everything else.  If that portfolio were down 50% and his buyback were at the same price, it would instead be 20 cents going toward the equity portfolio and 80 cents toward everything else.  He'd have to assume Berkshire was 1/3rd more valuable than it was previously to want to buy back it versus just spending the same amount of money to increase his stake in the portfolio companies.

 

Put another way, if Berkshire's IV includes a prorata IV of each portfolio holding, then each individual stock as well as Berkshire as a whole is an opportunity to deploy capital at a discount. If the market value of his securities is down way more than the market as a whole, and is not permanently impaired, then it stands to reason that the discount to IV of many holdings has grown by a bigger gap than the discount of Berkshire overall.  If he can deploy capital into a 70 cent dollar with one of his stocks versus an 80 cent dollar with Berkshire that would affect his decision.

[ragu]

--When pressed for further details on the mystery deal, Buffett says, "I'll give you a hint. It's on this planet."

 

Mars, then?