Buffett buybacks: Could Berkshire tender stock?

[CassiusKing1]

What are the rules around Buffett's stake that he's donating to the Gates foundation?  Can those shares be bought back in private transaction blocks?

[james22]

Or, possibly, when he dies.

 

Yeah, don't understand why people fear the share price dropping with Buffett's death when BRK itself would be buying if it fell.

[alwaysinvert]

This is an observation from SwedishValue. 675 A-shares traded over the market between February 26 and 28 according to nyse.com. Despite that Berkshire bought back as many as 293 shares. Which raised the following questions:

 

1. Is the 25% of daily volume limit divided up on the different share classes or is it total traded volume in all common stock?*

 

2. Is there a rule that you have to report private transactions or has this only been a general assumption due to the last estate repurchase (when they also announced a higher buyback limit)? 

 

*The average purchase price level compared to the market prices on said dates seems to indicate that they could not feasibly have been bought over the market.

[John Hjorth]

Cornell Law School - Legal Information Institute : 17 CFR § 240.10b-18 - Purchases of certain equity securities by the issuer and others.

 

(1)ADTV means the average daily trading volume reported for the security during the four calendar weeks preceding the week in which the Rule 10b-18 purchase is to be effected.

 

If one press on the embedded link "security", you get a pop-up with the legal definition of the word "security" in this context :

 

security

(5) The term security shall include any security defined as such pursuant to section 3(a)(10) of the Act, but shall exclude any class of security having a preference or priority over the issuer's common stock as to dividends, interest payments, redemption or payments in liquidation, if the voting rights of such securities only become effective as a result of specified events, not relating to an acquisition of the common stock of the issuer, which reasonably can be expected to jeopardize the issuer's financial ability to meet its payment obligations to the holders of that class of securities.

 

So, ref. alwaysinvert's question 1, I conclude ADTV is calculated based on total volume for the A and the B.

 

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Edit:

 

Cornell Law School - Legal Information Institute : 17 CFR § 229.703 - Purchases of equity securities by the issuer and affiliated purchasers.

 

Please note:

 

... Instruction to paragraph (b)(1) of Item 703: Include in this column all issuer repurchases, including those made pursuant to publicly announced plans or programs and those not made pursuant to publicly announced plans or programs. Briefly disclose, by footnote to the table, the number of shares purchased other than through a publicly announced plan or program and the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the company's obligations upon exercise of outstanding put options issued by the company, or other transactions). ...

 

and

 

... Instruction to Item 703: Disclose all purchases covered by this Item, including purchases that do not satisfy the conditions of the safe harbor of § 240.10b-18 of this chapter.

[Dynamic]

They only need to follow Rule 10b-18 if they want to obtain the Safe Harbor protections that come with it, but it's voluntary and you can deviate from those guidelines if you don't need the safe harbor protections.

 

That link isn't fully comprehensive regarding what to do in the event of having two classes of shares, but the SEC's 10b-18 FAQ says that each class of shares must be treated separately. It also states that just because you exceed the trade outside of the safe harbor provisions, they will not assume that you are acting in a fraudulent or manipulating manner.

 

In the amended 10b-18 rules they state:

Although the safe harbor conditions are intended to offer issuers guidance when repurchasing their securities in the open market, Rule 10b-18 is not the exclusive means of making non-manipulative issuer repurchases. As the Rule states, there is no presumption that bids or purchases outside of the safe harbor violate Sections 9(a)(2) or 10(b) of the Exchange Act, or Rule 10b-5 under the Exchange Act. Given the widely varying characteristics in the market for the stock of different issuers, it is possible for issuer repurchases to be made outside of the safe harbor conditions and not be manipulative.

 

They detail the suggested amendments and the results of the consultation process, then outline the amendments they actually adopted:

d. Adopted amendments to the volume condition

 

After carefully considering the comments received, and upon thorough examination of current market practices and the underlying purposes of the safe harbor, we are adopting the proposed amendments relating to the volume condition's treatment of block purchases, with some modifications in response to comments received. Under the amended volume condition, to qualify for the safe harbor, an issuer's total volume of Rule 10b-18 purchases effected on any single day must not exceed 25% of the ADTV in its security, which includes any block-size purchases by or on behalf of the issuer for that day. Issuers, however, can include their block-size purchases when calculating its security's four-week ADTV.

 

In view of commenters' concerns that eliminating the block exception would negatively affect issuers with moderate or low average daily trading volumes that rely heavily on block purchases to implement their repurchase programs, we have decided to allow issuers to make (within the safe harbor) one block purchase per week, provided that the issuer does not make any other Rule 10b-18 purchases on that day. Thus, alternatively, once each week the issuer may purchase one block of its common stock in lieu of purchasing under the 25% volume limitation for that day. However, shares purchased by the issuer relying on this amended block exception may not be included when calculating a security's four-week ADTV under the Rule. This amended block exception is intended to provide issuers with moderate or low ADTV greater flexibility in carrying out their repurchase programs. However, this amended block exception does not include any amount of securities that a broker or dealer, acting as principal, has accumulated for the purpose of selling to the issuer, if the issuer knows or has reason to know that such amount was accumulated for such purpose.

 

We also wish to reiterate that Rule 10b-18 is not the exclusive means by which issuers and their affiliated purchasers may effect purchases of the issuer's stock without manipulating the market. In fact, the Commission has long recognized that there may be circumstances under which an issuer could effect repurchases outside the volume limitation without raising manipulative concerns, and indeed that failure to satisfy the conditions of the safe harbor does not give rise to any presumption that the activity is manipulative.

 

There had been a suggestion about allowing 500 share block trades even if they exceeded 25% of ADTV but I don't think this was adopted.

 

So, first the average volume (ADTV) is over 4 weeks preceding the purchase (or possibly preceding the Monday of the week in which the purchase took place - you'd have to dig into the references to be sure).

 

I think Berkshire will be careful not to be manipulating its own stock and to have evidence they are not in case of an investigation, even if they chose to deviate from 10b-18 provisions. They would be careful not to be deviate from rule 10b-18 safe harbor provisions if they're ever involved in any potential acquisition bids where they would pay partly in Berkshire stock and could be accused of inflating their stock to make their bid look more attractive.

 

There are also amendments allowing a certain amount of repurchasing during Off Hours Trading at lower of the primary market's closing price and the lowest bid in the Off Hours trading provided they don't make the first OHT purchase after the close.

 

There is scope to read the whole thing from the SEC, but I think we're clarifying the general picture and realising that Berkshire is quite at liberty to repurchase outside the scope of Rule 10b-18 so long as they do not act in any fashion that could be deemed to be stock manipulation or fraudulent activity if investigated by the SEC (in particular, activity aimed at artificially boosting the stock price above the fair value that would be arrived at by independent market participants. I'd imagine that buying at or below the independent bid and avoiding trading to near the open or close, would probably satisfy that.

[alwaysinvert]

Ok, so according to Rule 10b-18 the ADTV of As and Bs are lumped together.

 

However, you don't necessarily have to abide by the stricter repurchasing rules (volume limit, time restrictions, etc) if you aren't outsourcing the repurchasing to a third party. Which we assume that BRK has not been doing lately, as they seem not to have been repurchasing during the quiet periods since last fall. Then it falls under more general rules about market manipulation and insider trading. Is this correctly concluded?

[John Hjorth]

Thank you for a very useful elaboration on this complicated stuff, Dynamic,

 

And after studying the FAQ I think that Dynamic must be correct about not lumping together the two share classes while calculating ADTV, subject to seeking Safe Harbor. It's specifically phrased in A to Q8 in the FAQ in a way, that - at least to me personally - leaves no leeway for interpretation.

[Dynamic]

Yes, I would agree, John, that the SEC's FAQ seems quite explicit that the two classes are treated separately for calculating ADTV, and it's over the previous 4 weeks that ADTV is calculated (whatever precisely the previous 4 weeks means).

 

But in any case, Berkshire isn't necessarily doing anything wrong if it exceeds 25% of ADTV on any class, especially if it makes a single block purchase on a trading day and no other purchases and thereby complies with Safe Harbor. Or if it engages in trading of a type that is clearly not possible to be construed as stock price manipulation it can happily venture beyond the Safe Harbor provisions anyway providing it complies with all the other rules about disclosure.

[John Hjorth]

... However, you don't necessarily have to abide by the stricter repurchasing rules (volume limit, time restrictions, etc) if you aren't outsourcing the repurchasing to a third party. Which we assume that BRK has not been doing lately, as they seem not to have been repurchasing during the quiet periods since last fall. Then it falls under more general rules about market manipulation and insider trading. Is this correctly concluded?

 

Personally, I perceive it as you do here, alwaysinvert,

 

The last couple of days I've been thinking about to picture what's going on at Berkshire HQ on daily basis in the meaning of daily routines over an "ordinary" year wheel [what ever that may imply] for Mr. Buffett:

 

Minus 6. Taking care of responses to incoming mail, carefully sorted by a secretary taking care of "a priori defined trivia" sorted out,

Minus 5. Answering phone calls carefully filtered by a competent secretary, who knows exactly how to "filter", refer & delegate,

Minus 4. Sign original filings [presented to him, with the expectation that they are correct & timely],

Minus 3. Take care of all compensation matters for persons referring direct to him,

Minus 2. Write the annual shareholder letter [in cooperation with a professional & experienced editor],

Minus 1. Follow-up on everything inside Berkshire, on which Mr. Buffett wants to do so,

 

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0. And so on, ordered by your personal discretion - please add what ever you prefer, and renumber accordingly, by your personal perception of priority,

 

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1. Berkshire capital allocation [buybacks and/or deals]

 

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I certainly acknowledge and respect the posts by Dynamic on this matter - But I just can't see Mr. Buffett even considering anything BRK price sensitive on his desk, while at the same time having instructed an employeé to buyback BRK shares.

 

Based on that, it's extremely fascinating, that your [to me : correct] observations about silent periods vs. actually buybacks provides basis for the opposite.

 

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So, to me, this is the ultimate patience test of shareholders with regard to patience for delayed gratification. We will be opposed to it - or even hate it - until we love it, because of market conditions. [And most likely, when that happens, nobody will talk about opportunity costs.]

[alwaysinvert]

Barron's from today: https://www.barrons.com/articles/berkshire-hathaways-earnings-are-saturday-heres-what-to-watch-51564481706

 

Select quotes:

 

It’s hard to handicap the Berkshire buybacks because Buffett gives no guidance, but bulls may be disappointed. Barclays analyst Jay Gelb , one of only a handful of people covering the stock, expects the second-quarter buyback figure to come in at $1.5 billion, in line with the $1.6 billion in the first quarter, according to a client note.

 

Another limiting factor is that Berkshire shares are less liquid than those of most megacap stocks. The average daily trading volume in the Class A and Class B shares totals about $1 billion, about a quarter of the dollar volume in Facebook (FB), which has a similar market value.

 

Berkshire has a much higher proportion of long-term, buy-and-hold investors than the average large company, resulting in lower trading volume. That makes it harder to repurchase shares without moving the price.

 

If Berkshire is serious about repurchasing shares, it could make a tender offer to buy a large amount of stock. That isn’t likely, but it would demonstrate Buffett and Munger think the stock is cheap.

 

Seems like maybe Andrew has been reading COBF.

[DooDiligence]

I hope he didn't buy squat.

 

More cash piles up.

 

Shares go below $200.

 

(beep, beep, beep - trucks backing up)

 

Then they start buying shares over the next ? years (or not.)

 

Great bunch of businesses.

 

It's like an Easter egg.

[John Hjorth]

... Seems like maybe Andrew has been reading COBF.

 

Thank you for sharing, alwaysinvert,

 

Yes, it appears quite striking. Let's see Saturday, how the last quarter has played out.

[Dynamic]

Here goes, another long post!

 

Personally, I'm not anticipating a particularly large level of buybacks this quarter, though I wouldn't exactly be shocked if it doubled from Q1 either, but still I'm not expecting a truly enormous buyback volume that some fellow investors are hoping for.

 

I imagine with the current IV estimate and the last reported Book Value and 2018Q3 high point of reported Book Value, we'd probably need prices in the low $190s or less to see really substantial buybacks, so perhaps compared to the old 120% of Book Value, maybe we'd be looking at somewhere below 125% of Book Value (or 125% of the highest reported Book Value) as the point where buyback eagerness would really start to ramp up. It's quite possible that later this year or early next, if compound growth continues and, if BVPS on BRK.B reaches, say $163 which is certainly quite plausible, prices below $204 or so might begin to fall into the range where some buyback eagerness might become evident.

 

Basically, we haven't really had those sort of price/book ratios since about January/February 2016 when I personally laid my hands on all the money I could to load up on Berkshire around 123% of Book Value (one tranche costing just under 120% of 2015Q4 Book Value that hadn't been released, and another a fraction over 120%), those being prior to the 2017 Tax Cut. Even the $186 low in July 2018 was 132% of known book and 128% of the as-yet-unknown 2018Q2 Book Value. The 24th December 2018 $187.11 low was 123% of last known book value (despite a -20% bear market) and 132% of the eventual 2018Q4 Book Value that was unknown at the time and it hasn't dipped a low as $190 since that single day.

 

I'd expect large buybacks to remain a rarity. Over time, BV may become further detached from IV, but IV is probably still running at a near-constant multiple of BVPS that might be very gradually changing over time, and would change a little more rapidly if there were significant buybacks.

 

From re-reading the Semper Augustus 2018 letter, I'm thinking that now is not a time when Buffett is salivating over equity prices generally, though there are some sensible things to buy.

Today it doesn't match the position where there was huge Berkshire overpricing of the late 1990s when it bought Gen Re with Berkshire stock trading at close to twice IV, considerably reducing the exposure to the greatly overpriced stock portfolio by buying in a bond-heavy operation.

 

I suspect that on the whole Berkshire is currently trying to do little more than invest the cash thrown off by the operating companies and other cash inflows such as dividends, roughly keeping cash and short-term investments balanced with insurance float (which I imagine will be around $125 billion at end of Q2). It will be interesting to see whether the Occidental deal during Q2 will be additional to the typical spending on equities or will have replaced some of Berkshire's equity buying appetite. We do know they added just over 31 million shares of BAC by 17th July, accounting for $0.8-0.9 billion, but the rest of their activity is still unknown.

 

Although this cash-to-float parity may be somewhat coincidental rather than intentional, I do feel it absolves Berkshire from having an overall cash drag to count against them, it's just that Berkshire will, when the time and price is right, have ample dry powder to take on deeply undervalued investments in stocks or whole businesses, taking advantage of non-callable float-funded leverage at just the right time. To me it's all about patience and the long game, waiting for the fat pitch and locking in a substantial increase in intrinsic value when it arrives with the use of a little float leverage too. Buffett's patience far exceeds most of ours!

 

In the mean time, compounding Book Value at 9-11% cagr over a decade or two of low inflation and low interest rates without leverage is a great performance for such a large diversified business. Now the P/BV multiple has declined about as low as it's likely to outside extreme events, I'd expect that the future BV compounding rate ought to pretty well be reflected in the stock price compounding rate, and if that remains in the 9-11% cagr region, that's a good enough return for a low risk business in a low rate, low inflation environment, especially when the current P/BV ratio probably implies a fairly limited short-term downside risk.

 

While I can't claim to predict the short term, I suspect that a lack of heavy buybacks in Q2 wouldn't be enough to keep Berkshire's price down once Saturday's results are out. GAAP earnings will surely be huge thanks in part to the portfolio's market value increases (excluding KHC). The share of KHC's results for Q1 and Q2 may also be included in earnings if they have caught up on reporting deadlines by Friday. And the Book Value Per Share is almost certain to be up about 3.7% since Q1 clocking a new all-time high about 2.3% above 2018Q3, with prospects for 2019Q3 looking like also showing a worthwhile increase from there. It could be that a degree of measured optimism or at least reduced pessimism about Berkshire will break out in the coming weeks and months.

 

In the slightly longer term, headlines about underperforming or barely outperforming the S&P500 could be on the wane. It's quite a tough 10-year comparison to compare Berkshire to the depth of the 2009 Great Financial Crisis bear market (2nd March 2009 was 1435 for the SP500TR, now 6053, and 1104 for the S&P500 capital index, which is now over 3000, and BRK is up only 334% versus 386% for the total return index since that trough) and this tough comparison will ease somewhat over time for the 10-year side-by-side. This is an observation I received from someone else.

 

Even if Berkshire is re-rated upwards a little it might yet take a bear market for Berkshire to gain a clear lead. Interestingly a chart from March 2002 to today, shows that Berkshire more or less matched the index until mid 2007 then gained a lead by December as the market fell, a lead that it never really gave back, although the index almost caught it in May 2011.

 

I think Berkshire's success if it does retain an edge over the index in the long run, is likely to be a lumpy affair where it has periods of great opportunity where it generates substantial additional value which then gets recognised in its price, punctuating long stretches of roughly market-matching performance. And there may also be moments of market mania where the index temporarily peaks well above Berkshire. I doubt that Berkshire's price is likely to ever greatly exceed IV again like the late 90s such as June 1998, but even for someone buying then, Berkshire eventually caught up after years of lagging the index.

 

Anyway, Saturday's will be an interesting 10-Q to read through and perhaps we'll develop more of a picture of a few facets of Berkshire's capital allocation mindset.

[Guest longinvestor]

Here goes, ...

 

I think Berkshire's success if it does retain an edge over the index in the long run, is likely to be a lumpy affair where it has periods of great opportunity where it generates substantial additional value which then gets recognised in its price, punctuating long stretches of roughly market-matching performance. And there may also be moments of market mania where the index temporarily peaks well above Berkshire. I doubt that Berkshire's price is likely to ever greatly exceed IV again like the late 90s such as June 1998, but even for someone buying then, Berkshire eventually caught up after years of lagging the index.

...,,

 

Buffett has been preparing shareholders for the modest, if any, edge in the future. He has also consistently said that he’d rather prefer Berkshire shares to sell (slightly) below IV. If your long term prediction comes true, it’ll be good for the next CEO. He won’t disappoint new shareholders that way. This is an important part of the coming transition because Berkshire’s shareholders will be an important piece of the culture remaining intact. This is something that current management has not had to deal with. So far. But, boy, there’re some pi$$ed off folks right now, who may be more p’ed off come Saturday

 

 

[John Hjorth]

Here goes, ...

 

I think Berkshire's success if it does retain an edge over the index in the long run, is likely to be a lumpy affair where it has periods of great opportunity where it generates substantial additional value which then gets recognised in its price, punctuating long stretches of roughly market-matching performance. And there may also be moments of market mania where the index temporarily peaks well above Berkshire. I doubt that Berkshire's price is likely to ever greatly exceed IV again like the late 90s such as June 1998, but even for someone buying then, Berkshire eventually caught up after years of lagging the index.

...,,

 

Buffett has been preparing shareholders for the modest, if any, edge in the future. He has also consistently said that he’d rather prefer Berkshire shares to sell (slightly) below IV. If your long term prediction comes true, it’ll be good for the next CEO. He won’t disappoint new shareholders that way. This is an important part of the coming transition because Berkshire’s shareholders will be an important piece of the culture remaining intact. This is something that current management has not had to deal with. So far. But, boy, there’re some pi$$ed off folks right now, who may be more p’ed off come Saturday

 

Thank you for sharing your thoughts, gents,

 

Not so long ago, longinvestor posted something about Berkshire hasn't moved one whit within the last year with regard to market price. Now please make that the last 18 months - so or so.

 

I suppose, quite some "socalled long term investors" [three months, six months, one year, or so], have lost all patience, and have sold. [Duly noting, that among money managers, "long term" orientation is used as an excuse for lack of performance.]

 

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To me, the real "dark horse" here [with regard to stock buybacks] is what's going on with the Berkshire positions of the early Berkshire investors over time. [That could move the needle, at least somewhat.]

[bizaro86]

If long term investors are capitulating, I hope WEB is buying their shares today on all our behalf.

[John Hjorth]

If long term investors are capitulating, I hope WEB is buying their shares today on all our behalf.

 

bizaro,

 

+1.

[Guest longinvestor]

If they buyback, in order to spend $100B,

 

1B per Q, 100 quarters, 25 years

2B, 12.5 years

3B...

 

I could be dead in some of the scenarios. Oh Warren, don't do that to me :'(

 

[CassiusKing1]

[gfp]

Looks like ~ $442 million worth of repurchases in the quarter

 

And looks like Friday's close was almost exactly at 1.3x quarter end Book Value - BVPS is 156.08

 

Cash at $122 Billion, $200 billion stock portfolio (ex KHC), $20 Billion bond portfolio, float rising at $1 Billion / quarter to $125 B

[scorpioncapital]

I think it's more...

 

"Stock buybacks: Berkshire bought back 1,539 shares of Class A stock and 8.29M of Class B shares during the quarter, more than the 1,258 Class A shares and 6.53M of Class B shares it acquired in Q1."

 

8.29m x $200 share = 1.65 billion

1539 a shares x 300,000 = 461m..

 

eyeballing it would be around 2 billion. According to the previous poster that would be 12.5 years to spend 100 billion. Of course by then, we can reasonably expected another 250-300 billion.

 

[gfp]

What is your source for the quote?  Not the 10Q

 

I think it's more...

 

"Stock buybacks: Berkshire bought back 1,539 shares of Class A stock and 8.29M of Class B shares during the quarter, more than the 1,258 Class A shares and 6.53M of Class B shares it acquired in Q1."

 

8.29m x $200 share = 1.65 billion

1539 a shares x 300,000 = 461m..

 

eyeballing it would be around 2 billion. According to the previous poster that would be 12.5 years to spend 100 billion. Of course by then, we can reasonably expected another 250-300 billion.

[Lemsip]

It is $442m buybacks according to the 10Q.  I notice seekingalpha has an inaccurate summary where they say the buyback was 8.29m B shares whereas it actually is 1.76m

[frog03]

BVPS Q4 2019 somewhere along 160 for B shares

With a conservative 1.5 multiple we arrive to 240.  Plenty of poential from here (with buybacks providing a cushion...)

 

[John Hjorth]

 

What is your source for the quote?  Not the 10Q

 

I think it's more...

 

"Stock buybacks: Berkshire bought back 1,539 shares of Class A stock and 8.29M of Class B shares during the quarter, more than the 1,258 Class A shares and 6.53M of Class B shares it acquired in Q1."

 

8.29m x $200 share = 1.65 billion

1539 a shares x 300,000 = 461m..

 

eyeballing it would be around 2 billion. According to the previous poster that would be 12.5 years to spend 100 billion. Of course by then, we can reasonably expected another 250-300 billion.

 

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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File with calculations attached.

BRK_-_Analysis_af_share_buybacks_2019H1_-_v1_-_20190803.xlsx