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2Q 2021


ValueMaven

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On 8/15/2021 at 12:34 AM, flesh said:

Remind me of the math here. I remember learning it when first studying autozone long ago. If 5% of share are repurchased what exactly happens to p/b/bvalue? Can't remember the denominator. 

 

The upshot is, if you retire a certain fraction R of shares outstanding, such as 0.05 (i.e. 5%) at a share price of P the formula is:

 

BVPSafter = (BVPSbefore - (P * R))

                 (1 - R)

 

So setting R = 0.05, P = $277.92 closing price on 30th June and BVPSbefore = $207.517

that comes to $203.812

 

To see the full working and a worked example, click to reveal the 'spoiler' below:

 

Spoiler

Let's lay out a few terms in capital letters and work in BRK Class B share equivalents, each Class A share being 1500 * class B

 

R = buyback ratio, e.g. 0.05 is 5% buyback.

BV = Book Value = Berkshire shareholder's equity

P = BRK.B share price (BRK.A share price can be assumed to be about 1500 * P)

SC = Share count (number of shares outstanding, measured in BRK.B share equivalent) = Number of B shares + (1500 * Number of A shares)

MC = Market Cap

BVPS = Book Value Per Share = BV / SC

P/BVPS = Price to Book Value ratio

 

Subscript before denotes before the buyback, and after denotes after the buyback.

 

BVPSbefore = BVbefore / SCbefore

 

BVafter = BVbefore - (P * R * SCbefore)

 

SCafter = SCbefore * (1 - Z)

 

BVPSafter =( BVPSbefore - (P * R)) / (1 - R)     after simplifying from BVafter / SCafter

 

Example:

So let's take 30th June 2021 figures (known only after the 10Q release for 2021 Q2) and assume a 5% buyback completed at the closing price that day, so:

 

R = 0.05 and (1 - R) = 0.95

BVbefore = $470,409,000,000

MCbefore = $630,001,000,000 (to 6 significant figures) based on

P = $277.92 BRK.B closing price 30th June 2021

SCbefore = 2,266,843,737 equivalent B shares outstanding

BVPSbefore = $207.517 per BRK.B share

P/BVPSbefore was 1.33926 on 30th June 2021

 

Trying out the formula for BVPSafter, we get:

BVPSafter = ( $ 207.517 - ( $277.92 * 0.05) ) / 0.95

= ($207.517 - $13.896) / 0.95

= $193.621 / 0.95

BVPSafter = $203.812

 

Now let's try it long-hand to confirm this:

 

Let's assume for simplicity buying back 5%, all at the closing price on 30th June 2021.

$31,500 million Cost to buy back 5% of o/s shares at closing price on 30th June 2021.

The cash balance of the business and the BV are reduced by this cost.

 

$438,909 million BV after purchase and retirement of 5% of shares o/s

 

Share count after retirement of 5% of shares = 2,153,501,550 B share equivalent.

 

Book Value Per B Share Equivalent after repurchase of 5% of shares o/s = $438,909,000,000 / 2,153,501,550 = $203.812

 

This matches the simplified formula above.

 

Price/BV after repurchase, still at $277.92 closing price, 30th June 2021 = $277.92 / $203.812 = 1.3636, which is a 1.8181% increase in P/BV.

 

BVPS reduction ratio = $203.812 / $207.517 = 0.982144

Reduction in BVPS = 1.78558%

 

If you came up with a figure for estimated Intrinsic Value IVbefore for Berkshire you could take a similarly methodical approach to estimating the reduction in total Intrinsic  Value then divide IVafter by SCafter to come up with the increased figure for IVPSafter

 

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