Buffett buybacks: Could Berkshire tender stock?

[John Hjorth]

I'm not sure where I got 8 days from, I've been out all day.  Perhaps it was an error in reading my notes.  More likely, with the price cap that appears to have been in place, it was 11 trading days.  If I remember what the hell I was thinking about when I wrote that I'll let you know..

 

But, yeah, as mentioned earlier - the 10Q on page 45 says, "Period"  "August 7 through August 24:"

 

And he had mentioned in the original announcement that he would wait until everyone had the same information (after earnings were publicly released).  Then he apparently waited one additional day, potentially for the reason I speculated in my previous post.

 

The gist is that Berkshire isn't buying back anywhere close to 25% of the average daily volume.  And there appears to be a price cap, likely based on a multiple of book value so it may change quarter to quarter.  Did the 'soft floor' just become a 'soft ceiling' ?  LOL

 

Thank you, globalfinancepartners, & my question #1 does not really matter, what had me really puzzled, was my question #2, which has been answered satisfactory by longinvestor. The whole thing makes sense to me now, actually, in the meaning that we're not any longer held in the dark. We have now black on white, that Berkshire has been buying back at average 207ish for the B share. That's sufficient for me.

[John Hjorth]

The exact level of buybacks might not be clear, but what is clear is that it amounts to bugger-all in the context of BRK's cash balances.  The finished the quarter with, what, $95 billion in cash and short term investments?  So dropping a bil on buybacks hardly constitutes an aggressive, high conviction move.

 

I say either get serious about deploying some of that cash on buybacks, or institute a considerable cash dividend.  Buying Apple sharss soaked up some cash, but it really doesnt inspire confidence in management given previous observations about circle of competence.

 

 

SJ

If he doesn't make a sudden surprise tender like I originally speculated (and that's a low probability), it's hard to draw any other conclusions from this than that dividends are way closer than previously suspected. Barring an -08 type drawdown the idle cash will keep growing at a rapid clip. A luxurious problem to have, but these puny buybacks don't even offer a partial solution.

 

StubbleJumper & alwaysinvert,

 

How do you feel and think about the whole thing today Monday?

 

- In a time context, your posts was just after the Berkshire 10-Q was released. Now we have had ongoing discussion during the weekend and analysis of the 10-Q, and it has come up that about ~USD 15B has been allocated to financials during 2018Q3 [- of the ~USD 15 B ~USD 6 B allocated to BAC -], on top of the share buyback of ~USD 1 B in the quarter.

 

Furthermore considerations/speculations [ time will tell ] that more capital has been allocated to perhaps BK, USB & GS, perhaps even new positions in financials.

 

Personally, I was a bit disappointed just after the release of the 10-Q, too. After a couple of nights sleep on it, I have a good feeling about this here Monday morning. The upward trend in liquidity surplus has been turned, and Berkshire is still the Rock of Gibraltar. All in all, not that bad, because it's actually able to generate good earnings and cash flow as it is.

[alwaysinvert]

The exact level of buybacks might not be clear, but what is clear is that it amounts to bugger-all in the context of BRK's cash balances.  The finished the quarter with, what, $95 billion in cash and short term investments?  So dropping a bil on buybacks hardly constitutes an aggressive, high conviction move.

 

I say either get serious about deploying some of that cash on buybacks, or institute a considerable cash dividend.  Buying Apple sharss soaked up some cash, but it really doesnt inspire confidence in management given previous observations about circle of competence.

 

 

SJ

If he doesn't make a sudden surprise tender like I originally speculated (and that's a low probability), it's hard to draw any other conclusions from this than that dividends are way closer than previously suspected. Barring an -08 type drawdown the idle cash will keep growing at a rapid clip. A luxurious problem to have, but these puny buybacks don't even offer a partial solution.

 

StubbleJumper & alwaysinvert,

 

How do you feel and think about the whole thing today Monday?

 

- In a time context, your posts was just after the Berkshire 10-Q was released. Now we have had ongoing discussion during the weekend and analysis of the 10-Q, and it has come up that about ~USD 15B has been allocated to financials during 2018Q3 [- of the ~USD 15 B ~USD 6 B allocated to BAC -], on top of the share buyback of ~USD 1 B in the quarter.

 

Furthermore considerations/speculations [ time will tell ] that more capital has been allocated to perhaps BK, USB & GS, perhaps even new positions in financials.

 

Personally, I was a bit disappointed just after the release of the 10-Q, too. After a couple of nights sleep on it, I have a good feeling about this here Monday morning. The upward trend in liquidity surplus has been turned, and Berkshire is still the Rock of Gibraltar. All in all, not that bad, because it's actually able to generate good earnings and cash flow as it is.

 

Nothing has changed. The further allocation towards BAC is a one time thing. The 10% limit is probably pretty much reached so that position now can't soak up further capital. Neither GS nor USB have potential to soak up that much capital either. From what Google tells me, the GS stake was $3b and USB was $5b in Q2 - by eyeglancing their market caps the maximum further allocation towards them is something like $8-9b combined. BK maybe makes for an additional $1.5b.

 

If there is no new bank/insurance stock position that explains the Q3 transactions and is pretty much it. We are back to square one in a quarter or two with regards to the cash.

 

He would need a non-financial stock with preferably a market cap in the several hundreds of billions to really make a difference (even more AAPL has not seemed enticing enough at recent prices). Or an acquisition in the +30b class, the last of which he made in 2015.

[John Hjorth]

Thanks, alwaysinvert,

 

Your post actually triggers me thinking that I'm personally biased here, because I haven't bought anything american but Berkshire and [big] US banks for the last 1½ years or so, [which is what Mr. Buffett here has done]. [i have bought some MKL & FFH too in that time span though, but that was more a matter of portfolio alignment, while something else got sold.]

 

And, yes, the forward time horizon under which to assess this situation matters.

[gfp]

dividends are way closer than previously suspected

 

It really does seem like Warren's been really clear in pointing out that cash dividends do not make sense with Berkshire trading above book value.  A dollar of after-tax earnings is worth less than a dollar if sent out in a cash dividend, or more than a dollar if retained.  Despite there bing a ceiling price on their repurchase plan, I do think repurchases are the way he will go.  And, of course, cash hasn't piled up the way many would have expected.  We're still here at $100 Billion.  One of these days he's going to buy a decent sized company.

[Cigarbutt]

http://www.rationalwalk.com/?p=16931

Interesting perspective and a few backward and forward looking questions.

[StubbleJumper]

The exact level of buybacks might not be clear, but what is clear is that it amounts to bugger-all in the context of BRK's cash balances.  The finished the quarter with, what, $95 billion in cash and short term investments?  So dropping a bil on buybacks hardly constitutes an aggressive, high conviction move.

 

I say either get serious about deploying some of that cash on buybacks, or institute a considerable cash dividend.  Buying Apple sharss soaked up some cash, but it really doesnt inspire confidence in management given previous observations about circle of competence.

 

 

SJ

If he doesn't make a sudden surprise tender like I originally speculated (and that's a low probability), it's hard to draw any other conclusions from this than that dividends are way closer than previously suspected. Barring an -08 type drawdown the idle cash will keep growing at a rapid clip. A luxurious problem to have, but these puny buybacks don't even offer a partial solution.

 

StubbleJumper & alwaysinvert,

 

How do you feel and think about the whole thing today Monday?

 

- In a time context, your posts was just after the Berkshire 10-Q was released. Now we have had ongoing discussion during the weekend and analysis of the 10-Q, and it has come up that about ~USD 15B has been allocated to financials during 2018Q3 [- of the ~USD 15 B ~USD 6 B allocated to BAC -], on top of the share buyback of ~USD 1 B in the quarter.

 

Furthermore considerations/speculations [ time will tell ] that more capital has been allocated to perhaps BK, USB & GS, perhaps even new positions in financials.

 

Personally, I was a bit disappointed just after the release of the 10-Q, too. After a couple of nights sleep on it, I have a good feeling about this here Monday morning. The upward trend in liquidity surplus has been turned, and Berkshire is still the Rock of Gibraltar. All in all, not that bad, because it's actually able to generate good earnings and cash flow as it is.

 

 

John,

 

Since the beginning, I have been skeptical of the Apple position because it struck me as outside of WEBs circle of competence and it has always struck me as a desperate move to deploy a large amount of cash.  The catalyst for that move has never quite been obvious to me -- what has Apple done in the past 12 or 18 months that suddenly merited such a large chunk of shareholders' capital?  The price didn't plunge rapidly to make it a 50 cent dollar.  Nope it was bought on fundamentals and operating results.  But, after racking up $110B± of cash it looks like brk is grasping for reasons to not initiate a healthy sized dividend or to not buy back a large slug of shares.

 

Turning to the purchase of large US financial companies (banks), nearly everybody on this board took a high conviction position about 5 or 6 years ago and we have made out like bandits.  The banks are still a buy, IMO, but are not as cheap as when we were all pounding on the table about BAC or JPM back in '11 or '12.  So why is brk suddenly taking a high(er) conviction position in the banks right at this moment?  A what point during the past five or so years were the US banks not an obvious purchase?  To be blunt, it was value in plain sight.  How did brk accumulate $110B± of cash when the banks have been an obvious outlet to deploy cash for the past 20 or so quarters?

 

The actions of the past year or so have struck me as a desperate effort to deploy cash and deny a basic reality.  That reality is that cash from ops is basically $40b per year.  Take off something for maintenance capex, new plant and equipment, and opportunistic acquisitions and you're looking at reasonably reliable cash surplus of about $20b per year.  The opportunities to deploy that much capital on an ongoing basis are not available in sufficient quality and high enough expected return to continue retaining 100 percent of earnings.

 

 

SJ

[ugadawg_98]

Don’t know if anyone else has posted this, but it’s worth a read. I note that WB has spoken favorably of Dr Singleton in the past, and since this thread was started regarding the possibility of a tender, this article seems relevant:

 

http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Singleton-and-Teledyne-A-Study-of-an-Excellent-Capital-Allocator.pdf

[alwaysinvert]

dividends are way closer than previously suspected

 

It really does seem like Warren's been really clear in pointing out that cash dividends do not make sense with Berkshire trading above book value.  A dollar of after-tax earnings is worth less than a dollar if sent out in a cash dividend, or more than a dollar if retained.  Despite there bing a ceiling price on their repurchase plan, I do think repurchases are the way he will go.  And, of course, cash hasn't piled up the way many would have expected.  We're still here at $100 Billion.  One of these days he's going to buy a decent sized company.

 

He has done two really significant acqusitions in the last 10 years (BNSF and PCP), whereas he would need one of those on average *every year* to motivate retaining all earnings in the future. Repurchases are an alternative possibility but the price (and size) he has done them at thus far doesn't give any indication that they will come even close to solving the "problem". It's very easy math and the numbers are just too big at this point. By my estimation, something has got to give decently soon, whether that's the buyback price level or dividends.

 

A dollar retained is not worth a dollar if you retain it just because the alternative of paying it out means making it 70 cents through taxes. How many cents on the dollar would you pay to get a return of ~2% before inflation and taxes and not having any control over when you can have disposal of it? Whatever your answer to that question is right now is what the marginal dollar at BRK is worth, because all the evidence available points towards it being impossible to deploy internally except in bonds.

[gfp]

I guess my point is that $1 retained is worth more than $1 any time Berkshire trades for more than book value.  And if it trades close to or below book value, he would buy back as much stock as he could get his hands on.  If the company trades at 1.01x book value, by definition a dollar retained is worth more than a dollar paid out (not even taking taxation into account)

[xo 1]

dividends are way closer than previously suspected

 

It really does seem like Warren's been really clear in pointing out that cash dividends do not make sense with Berkshire trading above book value.  A dollar of after-tax earnings is worth less than a dollar if sent out in a cash dividend, or more than a dollar if retained.  Despite there bing a ceiling price on their repurchase plan, I do think repurchases are the way he will go.  And, of course, cash hasn't piled up the way many would have expected.  We're still here at $100 Billion.  One of these days he's going to buy a decent sized company.

 

He has done two really significant acquisitions in the last 10 years (BNSF and PCP), whereas he would need one of those on average *every year* to motivate retaining all earnings in the future. Repurchases are an alternative possibility but the price (and size) he has done them at thus far doesn't give any indication that they will come even close to solving the "problem". It's very easy math and the numbers are just too big at this point. By my estimation, something has got to give decently soon, whether that's the buyback price level or dividends.

 

A dollar retained is not worth a dollar if you retain it just because the alternative of paying it out means making it 70 cents through taxes. How many cents on the dollar would you pay to get a return of ~2% before inflation and taxes and not having any control over when you can have disposal of it? Whatever your answer to that question is right now is what the marginal dollar at BRK is worth, because all the evidence available points towards it being impossible to deploy internally except in bonds.

 

I understand and respect the perspective.  The counter position, in my mind, is illustrated by the Great Financial Crisis.  Alice Schroeder has stated several times that, as well as Berkshire did with its investments in the GFC, it was not able to really back up the truck because of its bets on the equity indexes.  This has been explored already here:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/interview-with-alice-schroeder/

 

I can't help but believe that Buffett hesitates to return capital because he remembers well what it felt like to be light on cash in a time of great opportunity.  From my portfolio's perspective, that is the greatest value of BRK - it is anti-fragile to the extent it has gobs of cash available in the next crisis.  If it starts to accept that the cash will never be investable, then it needs to undertake promptly a return of cash to shareholders.  BRK may still have a position among my investments in that event, but the thesis will be different.  But I reject that the time to make that determination is nearly a decade into a bull market.  I'm not suggesting that a crash is imminent - only that the absence of satisfactory large opportunities is not likely to be permanent.

[xo 1]

Don’t know if anyone else has posted this, but it’s worth a read. I note that WB has spoken favorably of Dr Singleton in the past, and since this thread was started regarding the possibility of a tender, this article seems relevant:

 

http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Singleton-and-Teledyne-A-Study-of-an-Excellent-Capital-Allocator.pdf

Dr. Singleton had the "advantage" of being willing to take advantage of his shareholders.  One of the most powerful deterrents to BRK's repurchases has been a reticence to act greedily when the stock price was low.  I am ambivalent yet about whether to admire or regret the behavior - the loyalty of the shareholder base is a cardinal advantage.  If you start to treat them as arms'-length financial interests, you will surely lose that benefit.  Then, when the stock price sags, BRK risks a breakup at the very time it could be aggressively deploying its resources.  I appreciate why WEB dithers.  :-\

[nickenumbers]

 

I understand and respect the perspective.  The counter position, in my mind, is illustrated by the Great Financial Crisis.  Alice Schroeder has stated several times that, as well as Berkshire did with its investments in the GFC, it was not able to really back up the truck because of its bets on the equity indexes.  This has been explored already here:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/interview-with-alice-schroeder/

 

I can't help but believe that Buffett hesitates to return capital because he remembers well what it felt like to be light on cash in a time of great opportunity.  From my portfolio's perspective, that is the greatest value of BRK - it is anti-fragile to the extent it has gobs of cash available in the next crisis.  If it starts to accept that the cash will never be investable, then it needs to undertake promptly a return of cash to shareholders.  BRK may still have a position among my investments in that event, but the thesis will be different.  But I reject that the time to make that determination is nearly a decade into a bull market.  I'm not suggesting that a crash is imminent - only that the absence of satisfactory large opportunities is not likely to be permanent.

 

Now that make the most sense, rationally of all to me XO.  I don't know why WEB doesn't/didn't repurchase more of his own stock, but he might in the coming months.  If he doesn't, and if he has a view that he wants to have a HOG PILE of cash ready to move, your perspective still makes sense.  As Howard Marks says, we are in the 7, 8 or 9th inning of the game in our economy and a down turn WILL happen [who knows when]..  Having cash on hand might be handy.

 

I personally think that he should repurchase as much as he can while still maintaining a HOG PILE of cash.

[nickenumbers]

I just want to make sure that we all agree with each other on this “soft upper/lower limit” that I have read in the last couple of days regarding the BRK repurchase prices..  I appreciate the concept and the arithmetic that others have performed to derive it.  Thank you.

 

I think any discussion of such limits is moot, and too much time spent on it could be academic masturbation.  If the IV and BV of BRK is constantly changing and most likely increasing, the price at which BRK repurchased shares tells us something but not much at all as time passes.  If the IV is increasing BRK will do well to continue to purchase as the price vs value math is expanding.

 

I think trying to spend any exact precision on the purchase numbers and times/days, is probably a waste of time. 

 

Rather, I would argue, a 10K foot view of the events..  BRK is repurchasing shares, and BRK doesn’t make many mistakes in the pursuit of their own wealth accumulation.  The current prices resemble the prices that BRK paid, therefore we should all purchase the shares if we have a desire.  If prices continue to go up, that doesn’t necessarily make them a bad value, one must just continue to do the math on the IV.

 

What did I miss?  What do you guys think?

 

[Guest longinvestor]

I just want to make sure that we all agree with each other on this “soft upper/lower limit” that I have read in the last couple of days regarding the BRK repurchase prices..  I appreciate the concept and the arithmetic that others have performed to derive it.  Thank you.

 

I think any discussion of such limits is moot, and too much time spent on it could be academic masturbation.  If the IV and BV of BRK is constantly changing and most likely increasing, the price at which BRK repurchased shares tells us something but not much at all as time passes.  If the IV is increasing BRK will do well to continue to purchase as the price vs value math is expanding.

 

I think trying to spend any exact precision on the purchase numbers and times/days, is probably a waste of time. 

 

Rather, I would argue, a 10K foot view of the events..  BRK is repurchasing shares, and BRK doesn’t make many mistakes in the pursuit of their own wealth accumulation.  The current prices resemble the prices that BRK paid, therefore we should all purchase the shares if we have a desire.  If prices continue to go up, that doesn’t necessarily make them a bad value, one must just continue to do the math on the IV.

 

What did I miss?  What do you guys think?

 

Well said. I do agree with the choice of expression of yours Acad Mastu Shareholders should be enjoying the 100% jump in operating earnings more than A M. Only with 4/5th of the resources deployed!

 

 

[John Hjorth]

I just want to make sure that we all agree with each other on this “soft upper/lower limit” that I have read in the last couple of days regarding the BRK repurchase prices..  I appreciate the concept and the arithmetic that others have performed to derive it.  Thank you.

 

I think any discussion of such limits is moot, and too much time spent on it could be academic masturbation.  If the IV and BV of BRK is constantly changing and most likely increasing, the price at which BRK repurchased shares tells us something but not much at all as time passes.  If the IV is increasing BRK will do well to continue to purchase as the price vs value math is expanding.

 

I think trying to spend any exact precision on the purchase numbers and times/days, is probably a waste of time. 

 

Rather, I would argue, a 10K foot view of the events. ...

 

What did I miss?  What do you guys think?

 

In short, you and I don't agree.

[AdjustedEarnings]

I guess my point is that $1 retained is worth more than $1 any time Berkshire trades for more than book value.  And if it trades close to or below book value, he would buy back as much stock as he could get his hands on.  If the company trades at 1.01x book value, by definition a dollar retained is worth more than a dollar paid out (not even taking taxation into account)

 

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down.

 

The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.

[John Hjorth]

I guess my point is that $1 retained is worth more than $1 any time Berkshire trades for more than book value.  And if it trades close to or below book value, he would buy back as much stock as he could get his hands on.  If the company trades at 1.01x book value, by definition a dollar retained is worth more than a dollar paid out (not even taking taxation into account)

 

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down.

 

The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.

 

With regard to taxes for the in fact controlling shareholder, globalfinancepartner's point is far from moot. It appears evident to me, that you're most likely holding your Berkshire position in an account, where you're not subject to taxes on dividends, and that this fact is indeed perhaps blinding you.

[AdjustedEarnings]

I guess my point is that $1 retained is worth more than $1 any time Berkshire trades for more than book value.  And if it trades close to or below book value, he would buy back as much stock as he could get his hands on.  If the company trades at 1.01x book value, by definition a dollar retained is worth more than a dollar paid out (not even taking taxation into account)

 

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down.

 

The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.

 

With regard to taxes for the in fact controlling shareholder, globalfinancepartner's point is far from moot. It appears evident to me, that you're most likely holding your Berkshire position in an account, where you're not subject to taxes on dividends, and that this fact is indeed perhaps blinding you.

 

Sorry, I don't understand what you're saying. My point is exactly that taxes make dividends a bad idea. My math I showed supports that. So I'm not sure why I gave you the impression that I don't care about taxes. It's the opposite. Of course, to a policy question of what BRK should do, how I own my shares shouldn't matter... but even so, I do own them in a taxable account. In fact Berkshire is the type of thing you'd WANT in a taxable account (at least if you live in the US).... no dividends, long term gains, etc. all play well with the current tax law here.

[John Hjorth]

I guess my point is that $1 retained is worth more than $1 any time Berkshire trades for more than book value.  And if it trades close to or below book value, he would buy back as much stock as he could get his hands on.  If the company trades at 1.01x book value, by definition a dollar retained is worth more than a dollar paid out (not even taking taxation into account)

 

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down.

 

The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.

 

With regard to taxes for the in fact controlling shareholder, globalfinancepartner's point is far from moot. It appears evident to me, that you're most likely holding your Berkshire position in an account, where you're not subject to taxes on dividends, and that this fact is indeed perhaps blinding you.

 

Sorry, I don't understand what you're saying. My point is exactly that taxes make dividends a bad idea. My math I showed supports that. So I'm not sure why I gave you the impression that I don't care about taxes. It's the opposite. Of course, to a policy question of what BRK should do, how I own my shares shouldn't matter... but even so, I do own them in a taxable account. In fact Berkshire is the type of thing you'd WANT in a taxable account (at least if you live in the US).... no dividends, long term gains, etc. all play well with the current tax law here.

 

AdjustedEarnings,

 

Frankly, to me, you appear indisposed right now. For Mr. Buffett, the taxes on a dividend would reduce his donation capacity, measured in absolute USD [his 2006 pledge with amendments does not - as far as I can see - exclude him from suggesting a dividend though].

 

-Where do you think Mr. Buffett wants the money to go? - To the five foundations, or to the US IRS?

[AdjustedEarnings]

I guess my point is that $1 retained is worth more than $1 any time Berkshire trades for more than book value.  And if it trades close to or below book value, he would buy back as much stock as he could get his hands on.  If the company trades at 1.01x book value, by definition a dollar retained is worth more than a dollar paid out (not even taking taxation into account)

 

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down.

 

The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.

 

With regard to taxes for the in fact controlling shareholder, globalfinancepartner's point is far from moot. It appears evident to me, that you're most likely holding your Berkshire position in an account, where you're not subject to taxes on dividends, and that this fact is indeed perhaps blinding you.

 

Sorry, I don't understand what you're saying. My point is exactly that taxes make dividends a bad idea. My math I showed supports that. So I'm not sure why I gave you the impression that I don't care about taxes. It's the opposite. Of course, to a policy question of what BRK should do, how I own my shares shouldn't matter... but even so, I do own them in a taxable account. In fact Berkshire is the type of thing you'd WANT in a taxable account (at least if you live in the US).... no dividends, long term gains, etc. all play well with the current tax law here.

 

AdjustedEarnings,

 

Frankly, to me, you appear indisposed right now. For Mr. Buffett, the taxes on a dividend would reduce his donation capacity, measured in absolute USD [his 2006 pledge with amendments does not - as far as I can see - exclude him from suggesting a dividend though].

 

-Where do you think Mr. Buffett wants the money to go? - To the five foundations, or to the US IRS?

 

I don't understand what you're saying. I'm serious. I said dividends are a bad idea because of taxes. You said the same thing. WE ARE AGREEING. Yet, you are saying that I'm in disagreement with you somehow and indisposed? I am lost.

[SwedishValue]

All right, so I admit to have been quite wrong on my most meaningful conclusion: that Buffett had been buying back stock close to the theoretical limit and also for prices above 210 USD. I re-read some of the stuff Buffett wrote on buybacks and again came across a segment from the 1999 letter to shareholders (p. 16-17): http://www.berkshirehathaway.com/letters/final1999pdf.pdf

 

Here, Buffett writes the following:

 

"There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the

company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business

and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated. To this we add

a caveat: Shareholders should have been supplied all the information they need for estimating that value. Otherwise,

insiders could take advantage of their uninformed partners and buy out their interests at a fraction of true worth. We

have, on rare occasions, seen that happen. Usually, of course, chicanery is employed to drive stock prices up, not down." (my emphasis)

 

Is there an argument for Buffett now being able to repurchase more than the ca 8-9% of daily volume that he purchased during the days which he repurchased stock? My personal view of that is NO (since he wouldn't have repurchased to start with if he didn't feel like shareholders had been supplied with all the information they would need to estimate intrinsic value).

 

However, I'd like to hear your opinions on the matter.

[gfp]

He doesn't want to influence the price of the stock very much.  It is possible the price ceiling on the repurchase plan is tied to last reported book value, in which case it could be as high as 218 per B share currently.  But it is equally possible that the ceiling remains at 208 or whatever it is and Warren is just wanting to buy the stock cheaper than others believed.

 

The limiting factor on repurchases in the 3rd quarter was the price.  He would have repurchased a lot more stock if the price had stayed below the floor and their trader was able to be active every single trading day of the quarter.  As it happened, the trader was only able to purchase shares for 14 trading days during the 3rd quarter.

[nickenumbers]

Don’t know if anyone else has posted this, but it’s worth a read. I note that WB has spoken favorably of Dr Singleton in the past, and since this thread was started regarding the possibility of a tender, this article seems relevant:

 

http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Singleton-and-Teledyne-A-Study-of-an-Excellent-Capital-Allocator.pdf

 

Great article UGADAWG,  thanks for sharing it.  I just started to read thru it.

[alwaysinvert]

Some of the cash problem has seemingly disappeared with the entry into JPM during Q3. Approximately $30b more could be deployed into that stock. Being a highly liquid stock ($1.5b worth of trading daily) this could be done relatively swiftly depending on price action. The stake bought in Q3 only corresponds to about 4% of the average daily volume - not all that aggressive. Presumably the purchases have continued into Q4 in light of recent prices compared to Q3.

 

I expect that this will top out at 10% just like the rest of the bank stocks, barring a sharp move up in price. It is a bit curious why they didn't keep this purchase secret for the time being, like they have done in the past when building large positions (IBM, XOM, some others lately?). Maybe that is a strike against my idea that they will build a maximum size position.

 

Anyhow, this could conceivably be counted as Buffett scoring an elephant, if in slightly different guise.