Buffett buybacks: Could Berkshire tender stock?

[John Hjorth]

Thank you for the elaboration here, longinvestor,

 

Now I understand your former posts here on CoBF on the matter much better. I'll read Mr. Cunningham's book.

[John Hjorth]

I'm still thinking about longinvestor's last post in this topic.

 

From the special [anniversary] letter released February 27^th 2015, p. 36:

 

... Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both. If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice. You can be comfortable that your directors will make the right decision.^[1] ...

 

The changed buyback regime going forward was released on July 17^th 2018. -So not "probably between ten and twenty years from now", but actually more like 1,236 days, which equals roughly 3.4 years, likely caused by a combination of Berkshire performing well and deal flow drought.

 

[1] © Warren Buffett

[SwedishValue]

”If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice.”

 

Combine this with everything else that Buffett and Munger have said throughout the years about buybacks. I personally don’t believe it’s likely that Buffett would ”small-ball” a share buyback when he buys back. And i also don’t think Buffett would ever repurchase above intrinsic business value.

 

I’m like the man with a hammer now, but I would be seriously surprised if somehow Buffett bought back stock for less than two billion dollars this quarter.

[Guest longinvestor]

As a shareholder I'm squarely facing the dilemma of whether to rejoice or lament a rising share price environment. Its a struggle for me to move away from my default like for rising prices. (who doesn't ha.).

 

It is slowly sinking in that low prices are better, especially for Berkshire as they mull massive share buybacks. High price defeats the buyback intent. I believe Berkshire may be alone in this. Most businesses court analysts to drive share price higher. Managements are incentivized for that. Buffett keeps saying that they like low share prices of businesses they own and like to own more of. At the end of the day, it comes down to trust that price will catch up to value. Eventually. The weighing machine thing. Monumental patience is required. Coming to grips with this reality is quite an education for me.

[sleepydragon]

For all the stocks, except BRK, I wish for higher prices. Because I might sell next year.

For BRK, everyday I hope it go down, because I always want to buy more when I have more money.

Brk has become a savings vehicle for its shareholders

[The Investor]

Even if a strong, steadily growing company was to become cheaper relative to intrinsic value over a long time frame, you eventually realise a high return through rising dividends. As a long term holder of shares you don't even need the weighing machine effect to kick in (although in the real world it always seems to).

 

Berkshire will not pay a dividend until it makes sense to do so (and who knows when that will be?). That means if you have anything less than a multi-decade time horizon, you will be more dependent on the whims of the market to realise gains, than you would with a company that pays out some part of profits.

 

I was somewhat peeved at the recent runup in Berkshire, as I would like to buy more over time. If BRK goes to sub 1.3 P/B without something obviously terrible causing that, I'd be very pleased.

[John Hjorth]

... Berkshire will not pay a dividend until it makes sense to do so (and who knows when that will be?). ...

 

The Investor,

 

I suppose, by inverting the Berkshire Buyback Ammendment of July 17^th 2018, that would be when Mr. Buffett & Mr. Munger deems the Berkshire market price to be above intrinsic value per share, as one condition, out of maybe several.

[Guest longinvestor]

Even if a strong, steadily growing company was to become cheaper relative to intrinsic value over a long time frame, you eventually realise a high return through rising dividends. As a long term holder of shares you don't even need the weighing machine effect to kick in (although in the real world it always seems to).

 

Berkshire will not pay a dividend until it makes sense to do so (and who knows when that will be?). That means if you have anything less than a multi-decade time horizon, you will be more dependent on the whims of the market to realise gains, than you would with a company that pays out some part of profits.

 

I was somewhat peeved at the recent runup in Berkshire, as I would like to buy more over time. If BRK goes to sub 1.3 P/B without something obviously terrible causing that, I'd be very pleased.

 

I am actually in the camp that I don't want Berkshire to pay me a dividend. Reasons are simple, they pay a dividend when I don't need the cash. Or that amount of cash. I will make my own dividend by selling just enough shares when I need the cash. The price may be lower (on recency basis), and I am willing to accept that knowing that there will be other times when I sell at higher prices. It is all relative. Selling a small percent of your holding bought 10-15 years ago don't mean much. So yes, holding over multi-decade time horizon is a different ball game. Buffett kind of talks only to that crowd. 

 

[The Investor]

... Berkshire will not pay a dividend until it makes sense to do so (and who knows when that will be?). ...

 

The Investor,

 

I suppose, by inverting the Berkshire Buyback Ammendment of July 17^th 2018, that would be when Mr. Buffett & Mr. Munger deems the Berkshire market price to be above intrinsic value per share, as one condition, out of maybe several.

 

It might even be the only condition? Perhaps it should be fairly significantly above fair value though, due to the negative tax implication of a dividend for many owners.

 

If it's below intrinsic value buybacks should come before a dividend, if there are no more attractive options.

There might be a zone where it's slightly above intrinsic value so buybacks don't make sense and dividends don't either. Then I suppose lots of cash would build up until it moves one way or the other.

 

[The Investor]

Even if a strong, steadily growing company was to become cheaper relative to intrinsic value over a long time frame, you eventually realise a high return through rising dividends. As a long term holder of shares you don't even need the weighing machine effect to kick in (although in the real world it always seems to).

 

Berkshire will not pay a dividend until it makes sense to do so (and who knows when that will be?). That means if you have anything less than a multi-decade time horizon, you will be more dependent on the whims of the market to realise gains, than you would with a company that pays out some part of profits.

 

I was somewhat peeved at the recent runup in Berkshire, as I would like to buy more over time. If BRK goes to sub 1.3 P/B without something obviously terrible causing that, I'd be very pleased.

 

I am actually in the camp that I don't want Berkshire to pay me a dividend. Reasons are simple, they pay a dividend when I don't need the cash. Or that amount of cash. I will make my own dividend by selling just enough shares when I need the cash. The price may be lower (on recency basis), and I am willing to accept that knowing that there will be other times when I sell at higher prices. It is all relative. Selling a small percent of your holding bought 10-15 years ago don't mean much. So yes, holding over multi-decade time horizon is a different ball game. Buffett kind of talks only to that crowd.

 

Yes same here. I prefer not to get a dividend either, especially for the shares I own personally. Here in the UK there is no tax on undistributed income for personal holding companies, but the US would withhold 15% tax anyway, so it would still be disadvantageous from a tax perspective. In the case of UK companies paying a dividend, I would be able to keep reinvesting dividends received within my company with tax deferred until it's paid out to me personally.

[Guest longinvestor]

Are we at the cusp of a new cycle of greed @ Omaha? All market declines are for them but this one (if it comes true) is one they are so ($110 b)ready for. On your mark-get set...….

[Dynamic]

Yes, watching my portfolio plummet back from the all time high of $224 at yesterday's open, I was thinking Berkshire's broker could be getting busy with the buybacks today around $210, prices we haven't seen since the end of August.

[AdjustedEarnings]

Yeah, no question about it. The stock is below the now-infamous August 30 ("we bought back a little" day). $224 was better if one was looking to sell. But frankly, LT holders have to love the price drop. Now that they're no longer hoarding cash, it's nice to know that every price drop works in our favor if you just sit and let them shrink the equity (if Warren Buffett and John Malone had a child...). Better than waiting for that 'elephant' acquisition which comes every few years and hasn't come for a long time now. I do not think they're stopping at $210 either. My guesstimate (and that's all it can be) is that the buyback will continue to $220-$225 at least and that limit will move up as IV increases (though it could move down if rates were up a lot? But I suppose WEB uses higher than prevailing rates for his discounting, so maybe not by much). If we have a -20 or -30% on the S&P, BRK buyback will be epic. And you could sit on your position and not have to buy more to take advantage of the dips (if you don't want to or don't have the funds) because they'll be buying it in.

 

Buyers at $206 really have, again if they're in it for the LT, almost a one-way bet. You can be as sure as you'll ever be in stocks that there won't be a permanent impairment of capital. Plus, there's upside from here from valuation growth and business growth. Just my 20,600 cents.

[John Hjorth]

Are we at the cusp of a new cycle of greed @ Omaha? All market declines are for them but this one (if it comes true) is one they are so ($110 b)ready for. On your mark-get set...….

 

That would actually be great, if Berkshire had something listed on its watchlist, that would fit with regard to price in this situation. Time will tell.

 

[John Hjorth]

Yes, watching my portfolio plummet back from the all time high of $224 at yesterday's open, I was thinking Berkshire's broker could be getting busy with the buybacks today around $210, prices we haven't seen since the end of August.

 

compared to:

 

My understanding is that they are limited by rule 10b-18 to buying no more than 25% of the daily volume.  They are also not supposed to trade in the final 10 minutes before the close.

 

I would be very surprised if Warren purchased anywhere close to 25% of the daily volume of the combined share classes.  My impression is that he would feel that repurchase activity near the 25% level would influence the share price more than he desires.  It is impossible to completely eliminate your influence on the share price (witness the generally rising stock, closure of A/B share premium/discount, etc).

 

If I had to guess, I would guess that Berkshire established a 10b5-1 plan specifying a maximum price and a percentage of the trailing ADV to purchase.  I would guess that they specified somewhere around 10-15% of the Average Daily Volume, not to exceed 25% on any given day unless a large transaction was privately negotiated outside the plan (which would not be considered to be protected by the safe harbor of the plan).

 

They probably filed the 10b5-1 plan directly following their 10Q, allowing them to begin purchases under the plan immediately.  Buffett would receive daily trade confirms but isn't supposed to have any other communication with the broker he chose to administer the plan.  So he would know what was purchased each day and "we bought a little" is very difficult to quantify when you are talking about a half-trillion dollar market value enterprise...

 

We'll find out soon enough with the next 10Q and we can try to reverse engineer the % of daily volume they specified...

 

If this theory is correct then I gather there is no buyback pause during the blackout period? That would be a pretty major drawback to a more actively managed buyback program - 4 months a year where they can't make repurchases.

 

So, last week pretty strong resistance to general market price moves [outside the blackout period], ref. post #109 by sleepydragon, - this week [inside the blackout period] it moves around in the market price spectrum basically [give or take a bit] like any other stock.

 

Thoughts, gents?

[Guest longinvestor]

My $208 filled. Hope my $202 does as well.

 

 

 

[alwaysinvert]

Yes, watching my portfolio plummet back from the all time high of $224 at yesterday's open, I was thinking Berkshire's broker could be getting busy with the buybacks today around $210, prices we haven't seen since the end of August.

 

compared to:

 

My understanding is that they are limited by rule 10b-18 to buying no more than 25% of the daily volume.  They are also not supposed to trade in the final 10 minutes before the close.

 

I would be very surprised if Warren purchased anywhere close to 25% of the daily volume of the combined share classes.  My impression is that he would feel that repurchase activity near the 25% level would influence the share price more than he desires.  It is impossible to completely eliminate your influence on the share price (witness the generally rising stock, closure of A/B share premium/discount, etc).

 

If I had to guess, I would guess that Berkshire established a 10b5-1 plan specifying a maximum price and a percentage of the trailing ADV to purchase.  I would guess that they specified somewhere around 10-15% of the Average Daily Volume, not to exceed 25% on any given day unless a large transaction was privately negotiated outside the plan (which would not be considered to be protected by the safe harbor of the plan).

 

They probably filed the 10b5-1 plan directly following their 10Q, allowing them to begin purchases under the plan immediately.  Buffett would receive daily trade confirms but isn't supposed to have any other communication with the broker he chose to administer the plan.  So he would know what was purchased each day and "we bought a little" is very difficult to quantify when you are talking about a half-trillion dollar market value enterprise...

 

We'll find out soon enough with the next 10Q and we can try to reverse engineer the % of daily volume they specified...

 

If this theory is correct then I gather there is no buyback pause during the blackout period? That would be a pretty major drawback to a more actively managed buyback program - 4 months a year where they can't make repurchases.

 

So, last week pretty strong resistance to general market price moves [outside the blackout period], ref. post #109 by sleepydragon, - this week [inside the blackout period] it moves around in the market price spectrum basically [give or take a bit] like any other stock.

 

Thoughts, gents?

 

It is a possibility that there are no repurchases now, like you seem to suggest. But even if the buyback program is ongoing it would probably not give as much "support" to the price under such selling pressure.

 

I don't know if we will know any time soon if they are buying during the blackout period. Possibly we can surmise it from the Q4 report if there has been very heavy repurchases.

[alwaysinvert]

It could also of course be that they did'n't buy back anything after Buffett's comments.. I find that unlikely but let's not get ahead of ourselves.

[John Hjorth]

I actually think about it exactly like you, alwaysinvert. And, yes, it's speculation.

[alwaysinvert]

Here is a contrary take:

https://seekingalpha.com/article/4212476-will-berkshire-hathaway-implement-meaningful-share-repurchases

 

He mentions the unwillingness to pay dividends, but seems not to properly appreciate the levels of excess liquidity that we are talking about and what those to facts together imply. I also think he's wrong on the p/b levels at which buybacks can occur, especially since WB has already stated that he bought back stock when it traded above 1.3x. Adjusted for accruing cash flows, the stock is cheaper now than it was at that point. 

[John Hjorth]

I personally agree with you on your comments about that particular SA article, alwaysinvert.

[Dynamic]

Me too John, I had just read the SA article before seeing your post, alwaysinvert, and you hit every point that occurred to me. Although the signal to noise ratio of SA is not a patch on CoBF's, it (including the comments) isn't a bad place to gauge varied opinions and see where we might have a better perception that Mr Market, and sometimes also there are some real gems of great analysis posted there as well as technical analysis/chartism and stuff I'll happily skim over.

 

It is interesting that the (assumed) Berkshire portfolio has lost about -$6.3bn gross (-$5.0bn net of deferred tax benefit) since 30 Sep. That's about -$2.01 per BRK.B share reduction in the portfolio's contribution to Book Value in 18 calendar days since quarter end.

 

I'd guess roughly that BRK.B BVPS was maybe about $152.30 at 30 Sep, but might be a little below $151 today - perhaps around $150.90 (allowing for net earnings flowing in, less net portfolio decline flowing out). The repurchases might actually reduce BVPS a tiny bit, but increase IV per share slightly too.

[AdjustedEarnings]

Last night, as I was drifting off to sleep, a question occurred to me... does WEB count the market value of the securities portfolio or intrinsic value when calculating the IV of BRK? Theoretically, intrinsic value would make more sense because those securities are (presumably) owned because they're at a discount to IV. In practice, if this difference was large enough, they'd simply buy more of those stocks. On the other hand, they own others like KO, where I'm pretty sure WEB wouldn't buy more stock today. Also in practice, float is often an issue (10%+) as are taxes.  It's not a huge deal, just something fun to think about. So I figured I'd ask the group's thoughts. Thanks!

[Guest longinvestor]

Last night, as I was drifting off to sleep, a question occurred to me... does WEB count the market value of the securities portfolio or intrinsic value when calculating the IV of BRK? Theoretically, intrinsic value would make more sense because those securities are (presumably) owned because they're at a discount to IV. In practice, if this difference was large enough, they'd simply buy more of those stocks. On the other hand, they own others like KO, where I'm pretty sure WEB wouldn't buy more stock today. Also in practice, float is often an issue (10%+) as are taxes.  It's not a huge deal, just something fun to think about. So I figured I'd ask the group's thoughts. Thanks!

 

Surely a piece of the IV. But given their focus on increasing the pool of operating earnings (Munger called it converting liquid assets to illiquid ones) the securities portfolio gets smaller over time and perhaps an ever smaller piece of the IV pie.

 

Something of a corollary here is that identifying stellar owner operators has become more important than just valuing businesses. I would bet that lot of reading activity in Omaha (especially Todd/Ted) is focused on identifying good owner operators. Good news is that just like good businesses, they are not hordes of them running around.

[Cigarbutt]

Last night, as I was drifting off to sleep, a question occurred to me... does WEB count the market value of the securities portfolio or intrinsic value when calculating the IV of BRK? Theoretically, intrinsic value would make more sense because those securities are (presumably) owned because they're at a discount to IV. In practice, if this difference was large enough, they'd simply buy more of those stocks. On the other hand, they own others like KO, where I'm pretty sure WEB wouldn't buy more stock today. Also in practice, float is often an issue (10%+) as are taxes.  It's not a huge deal, just something fun to think about. So I figured I'd ask the group's thoughts. Thanks!

Fascinating question and would add that future opportunities will come from what is available at a cheap price wherever that may be.

 

Your question is difficult to answer because one has to rely on what is written between the lines and is subject to personal interpretations.

I guess we all have, to varying degrees of formalness, a list of owned stocks and a watchlist tabulating the ratio of price to intrinsic value, that we update on a regular basis. For Mr. Buffett, this may be recorded in a book slipped into his drawer but may simply be in his brain.

 

The 1979 annual report has useful comments (annual performance based on investments at cost and longer term performance OK with investments at market value) and more recently, Mr. Buffett has described his 2-column valuation "model". If interested, Mason Hawkins at Southeastern Asset Management periodically discusses this aspect when "monitoring" portfolios.

 

As value investors, typically, our recorded price to intrinsic value ratio should be below one as we allocate entries and exits in our portfolios. At Berkshire, there is a long term mindset and the turnover is relatively low but, in the main and long-term wise, the market has recorded the closing gap between intrinsic value at acquisition and at every year-end reporting. All that to say that I suspect the price to intrinsic value ratio at Berkshire is below 1 but not by much, especially since it has grown so much and because of present circumstances.

 

Wondering if Mr. Buffett makes adjustments or not, would say that the price to intrinsic value for marketable securities held may have gone down to some degree when capital constraints are felt and when maximum pessimism abounds (time for juicy returns, especially in the early days but also more recently, to a lesser extent) and may have come closer to one in different 180-degrees scenarios. However, I don't think Mr. Buffett needs to make adjustments, especially for the more recent period, for the following conceptual reason. My understanding is that the cash position at Berkshire tends to "naturally" increase when the price to intrinsic value gap decreases in BH portfolios. This happens because, despite cash being associated with an opportunity cost, I assume that Mr. Buffett considers that the temporal optionality value provided more than compensates for the opportunity cost and "naturally" allows to benefit from the widening gap opportunity occasionally seen.

 

In summary, I think Mr. Buffett does not adjust for the fluctuations of the intrinsic value gap for the marketable securities in his portfolios because of his long term and opportunistic valuation approach using financial flexibilty as an input.

 

As an aside, the recent "evolution" on the buyback stance may be related to evolving thoughts on the present opportunity cost of cash and the opportunity set (or absence thereof) on the horizon.