Buffett buybacks: Could Berkshire tender stock?

[DooDiligence]

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

 

Mars, then?

 

SpaceX  ;D

[sleepydragon]

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

 

Mars, then?

 

That’s a smart guess...

[aws]

I'm surprised by the increasing gap between the performance of Berkshire and the S&P.  It started on that big Apple drop day at the start of the year where Berkshire was down 5.5% vs. more like 2.5% for the market, and has continued through many days like today (Berkshire up 0.1% vs. S&P up 0.9%).  The gap is as of writing 15.46% underperformance YTD.  I decided to put this in a historical context and see how unusual this is.  Berkshire has underperformed the S&P 500 by more than 10% in a quarter nine times since the B shares were issued.  Five of them were in the late 90s when Berkshire was not participating in the tech bubble, and the Coke bubble they did participate in was starting to deflate.  Seven of the nine were positive quarters for the S&P, so Berkshire tended to underperform on big up quarters for the general market.

 

The largest was Q4 1999 when Berkshire had a -1.44% vs. a 14.88% rise in the S&P for a difference of 16.28%. 

 

This quarter is the second worst in history with a -2.32% for Berkshire vs. a 13.14% gain for the S&P for a difference of 15.46%.

 

With just three more days to go we're basically one more day like today away from setting a record for underperformance.  Hopefully in light of this we will see substantially more repurchases than we did in Q3 or Q4, but until we actually see it I'm quite skeptical.  Here's the table of data for quarters of > 10% underperformance:

 

Quarter Berkshire S&P Gap

Q3 1997 -5.38% 7.49% -12.87%

Q3 1998 -23.73% -9.95% -13.78%

Q2 1999 -4.72% 7.05% -11.77%

Q3 1999 -17.14% -6.24% -10.90%

Q4 1999 -1.40% 14.88% -16.28%

Q4 2002 -1.70% 8.44% -10.14%

Q2 2009 2.70% 15.93% -13.23%

Q4 2010 -3.11% 10.76% -13.87%

Q1 2019 -2.32% 13.14% -15.46%

 

[SwedishValue]

From the front page of the 10-k, we know Buffett didn’t repurchase any significant amount the first half of the first quarter. We’ll see eventually, I think repurchases makes sense from a price perspective.

[Lemsip]

I'm surprised by the increasing gap between the performance of Berkshire and the S&P.

A quarter is too short a time period to draw any conclusion since there is so much noise in price data over sich short periods.

Berkshire has flatlined after outperforming the S&P by 7% for the year ending 31 Dec and the market has moved up but these things happen. Last summer Berkshire was weak till July and then went on a 17% run in under 3 months to September.  Good time to be a buyer as the business is substantially cheaper than it has been for a while with no deterioration in the business.

 

With regard to buybacks, they are likely to be small this quarter. They had bought back only $14m by 15th Feb per 10-K. Buffett did explain in an interview that they were holding cash for a very big transaction that got away. Even if they had stepped up the buying after that, it is unlikely to be significant as they would only have about a month and half remaining. 

It will some years for buybacks to start showing their impact even if they were really stepping it up so for the foreseeable future, the main driver will continue to be operating earnings and the stock portfolio ( judged over a 3-5 year time frame - not every quarter)

[SwedishValue]

Thought I'd check back to offer some more color on the way I view things. First, I think your walk-through is interesting and informative AWS. If Buffett paused buybacks during early q1 due to price concerns (ergo, if he thought the mark-to-market losses were enough to decrease his desired price for repurchasing), then the validity of such a buyback pause is much smaller today considering the huge mark-to-market gains Buffett has had in his investment portfolio Q1.

 

I was surprised and disappointed to have misunderstand Buffett's new policy for buybacks, as I thought bigger buybacks were in the cards. Mostly I was disappointed in myself because I've always made it a point to read and watch everything Buffett related (interviews, AGM's, books, letters, etc.), and up until recently I've always thought it "easy" to understand Berkshire policy. Recently, my misjudgments of Berkshire makes me feel like a really dumb kid.

 

If Buffett has continued in the same fashion, preferring US treasuries to buying back Berkshire stock - even though he has said that the stock is undervalued (by buying back at these prices and prices higher than today), I would argue that he is actively deceiving shareholders in terms of the likelihood of him addressing the Berkshire cash issue. If he isn't buying back stock under March 2019 circumstances, when could we ever expect Buffett to deploy anything significant to buying back Berkshire shares in the future? In the case March 2019 is too bad to even buy back pitiful amounts of shares, mostly depression or scary recession scenarios would remain as possible opportunities for Buffett to deploy the cash. I think shareholders deserve to know if this is indeed the plan, or if buying back stock is as serious an alternative as Buffett and Munger have suggested in the past. Data so far suggests that buybacks are not a material share of the ongoing capital allocation even when they consider Berkshire stock to be significantly undervalued.

 

It's not likely anyone will call Buffett out on this, but it is a big issue. If they had bought back 10 times as much stock as they did for the first 6 months of the new buyback program, it would still only barely offset the increase in cash from operating earnings and increase of float. If they had bought back 20 times as much stock as they did, then we would still be looking at approximately a 3 year period before cash were down to around 30 USD Billion.

 

There are no indications from data - so far - that repurchases in any way will do anything material with excess Berkshire cash. I believe this is something that Buffett should be asked about and that shareholders deserve to know his stance on.

[aws]

My thoughts exactly.  Since the buyback restrictions was lifted, there hasn't really been a better time than right now to buy.  It wasn't a slam dunk in December at cheaper prices because so much else was going on and he was supposedly in talks to bag an elephant.  But now the elephant got away, everything else is more expensive, and Berkshire is much cheaper than prior prices he was buying at.  If buybacks are going to be material, not even to reduce the net cash balance, just to slow the growth of cash, then how can he be doing it so slowly, or when would he think would be a better time in the future?

 

[omagh]

...If he isn't buying back stock under March 2019 circumstances, when could we ever expect Buffett to deploy anything significant to buying back Berkshire shares in the future? In the case March 2019 is too bad to even buy back pitiful amounts of shares, mostly depression or scary recession scenarios would remain as possible opportunities for Buffett to deploy the cash. I think shareholders deserve to know if this is indeed the plan, or if buying back stock is as serious an alternative as Buffett and Munger have suggested in the past. Data so far suggests that buybacks are not a material share of the ongoing capital allocation even when they consider Berkshire stock to be significantly undervalued.

 

I wouldn't recommend extrapolating a few weeks behaviour indefinitely.  Buffett disclosed on CNBC that there was an elephant-sized acquisition in the works during the last few months which ultimately failed to close.  During an elephant acquisition, cash put to work at high rates of return, is MUCH more valuable than buying back whatever mildly-discounted BRK shares are fully available for repurchase.

 

- O

 

"If you speak up and put it [investment idea] on record, you end up getting too wedded to your thesis 
and that's dangerous because everything you're invested in is a function of the facts and circumstances on 
a given day, it changes" -- Ted Weschler

[John Hjorth]

I kindly ask all contributers to and readers of this topic to go back and revisit gfp's post #363 of February 25^th 2019 in this topic, quoted below :

 

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

 

Please do yourself the favor of reviewing the video with the interview of Mr. Buffett with Ms. Quick. Please ask yourself about your personal experience during the clip - especially with regard to Mr. Buffett's behavior and appearance in the clip.

 

To me, he has never been lingering and/or circling any question before he moves straight to question at hand. To me, it has always been "directly head on", and to me it still is. Not even somehow controversial questions I recall have had the ability to bring him out of personal balance [politics etc.].

 

Now what do you experience here with regard to Mr. Buffett's body language and general appearance? He did not get upset in any way, but anyway?

 

Normally he's "firing back" like a machine gun [friendly meant] immediately - no ping- & lead-time, & totally calme while replying. Here: A bit of unrest appears to take place - he's moving around a bit on the chair - even pausing a bit in his answers some places [absolutely not the normal], and Ms. Quick actually handles it the right way [she is Mr. Buffett's favorite interviewer, and is very good at "reading him" - she - so to say "clicks with him"] by asking him a totally open question in the end of this particular part of the total interview, that gives him the opportunity to leave the subject with a comment that calls for a smile, - and Ms. Quick actually lets it go from there.

 

Personally, I interpret this as Mr. Buffett being quite annoyed/disappointed, not by the question asked [knowing it would be asked], but from that the not specified deal did not work out, and Ms. Quick gently lets him off the hook here.

 

- - - o 0 o - - -

 

Elephants [at least these kind of potential elephants...] aren't really suitable for data driven analysis by us, -and certainly not related to Berkshire buybacks. [ ; - ) ]

[SwedishValue]

Yea, I’ve talked with my closest investor friend and I reacted too harshly. It still baffles me that Buffett didn’t repurchase during first half of q1, but like has been suggested by both Buffett and others: there are valid reasons for postponing buybacks at times.

 

It does make it harder to interpret and judge the level we can expect for buybacks over time however, and this is a big black box for valuation for an outsider like me.

[Lemsip]

I kindly ask all contributers to and readers of this topic to go back and revisit gfp's post #363 of February 25^th 2019 in this topic, quoted below :

 

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

 

Please do yourself the favor of reviewing the video with the interview of Mr. Buffett with Ms. Quick. Please ask yourself about your personal experience during the clip - especially with regard to Mr. Buffett's behavior and appearance in the clip.

 

 

That question that Becky Quick read out was from me and I asked it because I saw people obsessing over the minutae of Berkshire buybacks. I had predicted that the reason for the lower than average buying in Q4 was because they might have been working on an acquisition and Buffett confirmed it in his answer which I thought was rational and well explained even though it had to be drawn out by asking a direct question. People are not usually privy to the choices he is evaluating while making capital allocation decisions so most kneejerk reactions are based on very limited information.

People sometimes forget that Buffet's core focus as CEO of Berkshire is to increase operating earnings, not sit around watching stock prices and time buybacks.  Trying to get large acquisitions is where I want him to focus. He can do buybacks etc as he finds that advantageous vs alternatives n  but I do not expect a CEO of one of the largest companies in the world to be micro managing that aspect not does it make a material difference in short time frames. He has already for the first time made it explicit that Berkshire will be doing significant repurchases in the letter and I think that is good enough as long as the business overall creates value.

With regard to amount of buybacks, note that the pattern so far is that Berkshire has done most buybacks in specific blocks of a week or two so not having bought anything in size by 14th Feb doesn't mean much. He bought a billion's worth in a 2 week period in August in the 3rd quarter and the buying activity in the 4th quarter was also concentrated in 2 blocks of a week to ten days in October and December.

 

[alwaysinvert]

This really feels like beating a dead horse at this point, but here goes anyway. The issue won't die not because it is a fuzzing over minutiae, but because it is an interesting puzzle with large repercussions to shareholders.

 

He has, as mentioned, said explicitly that buybacks will be significant over time and given the record, I also think one should err on the side of believing that. However, this is impossible to square with 1) actions taken thus far - even when allowing for a pause due to a possible acquisition 2) average daily volume in the stock. There is no easy satisfying answer to this conundrum, hence why this thread was started in the very first place and has had so many posts.

 

The uses of the excess cash over time is way more important than whatever short or intermediate term acquisition Buffett can find. Both because the time for him to personally find such acquisition targets is running out fast and because mere size makes them just a partial solution anyway.

[tenyearsout]

Just a thought:

 

Berkshire acquiring an elephant would typically result in an increase in the market price of BRK shares. 

 

If Buffett knew that he had an elephant in his sights then he may have felt that any share repurchases at that time would have been unfair to current shareholders given that he had special insider information

[aws]

The books are closed on buybacks on the quarter, but we still have about five weeks until we can see what he did.  In terms of relative performance we are closed pretty much at the low point from a few days ago, 15.3% below the S&P total return YTD.  I know a quarter doesn't mean much, but the disparity is still quite striking to me.  Certainly seems like good buyback value to me and I hope he took advantage of it.

 

Berkshire can probably stand a more aggressive buyback than most stocks without affecting the share price.  It's underweighted in the S&P 500, I think by the percentage of Warren's holdings, so not as much index money flows into it.  Also, the foundations which receive his stock sell roughly $5 billion worth a year which can help can soak up some of the buyback cash. 

[DanielGMask]

Just a thought:

 

Berkshire acquiring an elephant would typically result in an increase in the market price of BRK shares. 

 

If Buffett knew that he had an elephant in his sights then he may have felt that any share repurchases at that time would have been unfair to current shareholders given that he had special insider information

 

This kind of talk is what I call to crimp the curl!

 

1) Buffett has been clear about how to calculate BRK's value.

2) He has clearly stated that buybacks could and would be done under IV if that is the best use of capital.

3) He has clearly stated that buybacks are a smarter use of capital than dividends.

 

So it's logical that everybody here is asking why he is not buying.

 

[AdjustedEarnings]

Can everybody throw out an estimate of what they think the buyback was and we'll see how close our consensus is when the real number comes out? I was waaaay off last time. Given that, through Feb 14, there had not been much in the way of the buyback, I think it's going to be light AGAIN. Maybe 300mm to 800mm, probably closer to the lower end of that. One thing I'm learning is (I posted on this before) that while WEB's rationale and his actions are mostly in sync, but not always. And the buyback is one of those anomalies where he'll tell you stocks are not expensive if rates are low, that BRK is not expensive, then the whole discourse he gave Steve Jobs about buybacks, etc. etc. and then not do anything about BRK's own buyback.

 

The reasons leave a lot to be desired: Don't want to take advantage of our partners.... well is it fair to take advantage of those who are staying for the sake of those who would leave? Do they not feel bad taking advantage of shareholders of companies where they're buying stock, such as Delta. I don't buy this taking advantage argument at all. When you buy back $1.4 billion of stock, is it okay to take advantage of some shareholders if it's on a small scale? Or that some or other acquisition is in the offing.... when you are WEB, you always have deals you are looking at. There simply are not enough 50bn+ dollar deals out there in companies that BRK can/will buy. The cash balance is truly getting silly now. There have been too many mistakes when they have done something (General Re, IBM, not selling KO, GOOG, etc.) Yet, I'm almost certain nothing will be done about it, except a lot of talk about what SHOULD be done. In fact, when they didn't follow through on the 2000 and 2011 buybacks, both times WEB/CM said that it was a mistake not to do so. And yet, here we are.

 

I feel like I'm turning into a cynic here but I think WEB has given folks a lot of reasons to feel that way. We'll soon be at 1 yr anniversary of the buyback announcement, the stock has been cheap during that time, and nothing of consequence has been done. Just imagine if Apple stopped their buyback because of the pending TV service. I don't think WEB would be very happy about that. With rates now at sub 3% for much longer, WEB/CM must really reconsider their priorities here. What are your estimates on the buyback?

[aws]

Unless he ends up buying back more than his foundations end up selling, which is on the order of $5 billion a year, then on a net basis he isn't even taking any shares out of the public float. 

 

I agree that I think it's going to be very low, maybe $400-500mm to put a narrow range around it.  Obviously I'm hoping for a lot more, but the shares were so weak in the quarter and I would expect a big buyback to be more noticeable. 

[Lemsip]

I would expect a range of $1 to $1.5bn unless he has been working on other deals.

 

Not having bought much by Feb 14 does not really matter. If you look at Q3 2018, all the buying of about a billion was concentrated in the space of 10 working days in August. The pattern was the same in Q4 with a block of a week to 10 days in October and December  accounting for all the buys with no buys on any of the other weeks .

So if he wanted to, he could have bought upto $2bn between Feb 14 and end of March. My guess would be closer to the amount seen in Q3 August i.e $1bn.

 

 

[villainx]

I'm kinda assuming it's just something that Buffett has to be comfortable with and then it's going to happen in a major way.  Either it will make sense or not, and when it clearly makes sense quarter after quarter, then Buffett will just own it.

[Swedish_Compounder]

My guess for this quarter is 1,5 BUSD.

 

I believe that he wanted to distribute the annual letter explaining how to value Berkshire before initiating buybacks in a big way.

 

He has probably bought lots of JPM during the quarter.

 

I would not be surprised to see annual buybacks of between 20-30 BUSD going forward, unless he makes major acquisitions that requires the cash on hand, because they will probably always go first, even if there would be more value in buybacks.

 

[John Hjorth]

... He has probably bought lots of JPM during the quarter. ...

 

Welcome back, Swedish_Compounder,

 

Yes, exactly. Buybacks is only a part the whole allocation task at Berkshire. Last time I made a calculation about JPM, I think I ended up with Berkshire could put about USD 30 B to work by building a full 10 percent position in JPM.

[SwedishValue]

Question for clarification: was there a silent period in which Buffett could not file the specific form to permit repurchases during the month leading up to the the release of the 10-k? Think I know the answer but I’d rather have some American hero help me out.

[nickenumbers]

This might have already have been discussed, but it was a little obscure to me and so I didn't want to attempt to search the thread.

 

 

If BRK was to repurchase shares directly from a shareholder with a large position, like THE GATES Foundation:

 

[*]When BRK transfers money to The Gates Foundation [or their stock agent] in exchange for the shares, would the transaction have to be reported into the public markets at the end of the day?

[*]If not at the end of the day when would it have to be reported?

[*]Can some thoughtful person speculate if there would be strategy to tranfering the money at the end of some period or reporting date so as to benefit BRK?  What strategy might there be in the timing of the purchase?

 

 

In common old Virginia talk-  If BRK is buying from The Gates foundation $2B a week for 10 weeks, when and how will we know?  If BRK doesn't want to tip its hand, does it just wait until the end of some regulated deadline and do the transfer for $20B at the last minute?  Why?  So as to not bid up the price and force BRK to potentially pay more?

 

 

Thank you in advance Super Brains of CoBF.

[DooDiligence]

This might have already have been discussed, but it was a little obscure to me and so I didn't want to attempt to search the thread.

 

 

If BRK was to repurchase shares directly from a shareholder with a large position, like THE GATES Foundation:

 

[*]When BRK transfers money to The Gates Foundation [or their stock agent] in exchange for the shares, would the transaction have to be reported into the public markets at the end of the day?

[*]If not at the end of the day when would it have to be reported?

[*]Can some thoughtful person speculate if there would be strategy to tranfering the money at the end of some period or reporting date so as to benefit BRK?  What strategy might there be in the timing of the purchase?

 

 

In common old Virginia talk-  If BRK is buying from The Gates foundation $2B a week for 10 weeks, when and how will we know?  If BRK doesn't want to tip its hand, does it just wait until the end of some regulated deadline and do the transfer for $20B at the last minute?  Why?  So as to not bid up the price and force BRK to potentially pay more?

 

 

Thank you in advance Super Brains of CoBF.

 

I can here the clicking & whirring of a fabulous brain on the North Shore.

[aws]

I just cannot imagine any chance of that happening.  It would just look shady to an outsider and I cannot imagine either party agreeing to that.  Imagine you didn't know the parties involved and heard that:

 

A CEO transferred stock to a private foundation and claimed a massive tax deduction, then using his control of a corporation negotiated buying back the same stock he personally donated, and the foundation despite supposedly being independent of both parties agreed to the sale outside of the market.

 

It would look like a CEO is funneling billions of dollars of shareholder money from a corporation he controls but does not own outright, to a private foundation, all while claiming billions of dollars of tax deductions, and raising questions if the transactions happened at fair prices under the circumstances.