Berkshire Capital Retention Test

[wknecht]

It's still early in the year, but with the market continuing to rise, it seems probable that Berkshire will not pass the five-year rolling capital retention test. I'm wondering folks specific thoughts on the implications of this until the time Berkshire begins to pass the test again.

 

My thoughts have always been that once the test is not met they will:

• pay out 100% of whatever earnings are not used for bolt-ons (or other use at the subs), working capital, and capital to keep rating agencies/regulators happy and Buffett sleeping well at night; and
  
• continue to retain prior year's earnings not yet deployed (with money for acquisitions coming from this pool).

I don't recall Buffett getting into specifics in the past, is this consistent with others expectations?

 

It's is a little frustrating because while the market seems to be outpacing fundamentals, Berkshire's intrinsic value per share is most likely outpacing book value (with the accounting oddities he has recently discussed, repurchases above book etc). So if it were put to a vote, I would vote for them to still keep the money. Another reason to root for the market to fall (as if anyone needed one).

[JBird]

A very good question to be asking.

 

The impression I got from listening to them at the meeting was that failing this test would not immediately change their dividend policy. Buffett simply stressed the importance of creating more than a dollar of market value for every dollar retained.

[racemize]

I agree, my impression is that they will still not change their course of action, though I wish he would have specified under what conditions they would (I guess when they subjectively think they cannot keep pace with the S&P over long periods of time going forward).

[jay21]

Where are the details of this test disclosed?  I must have missed it.

 

I think WEB should remove the ceiling on his buyback plan.  I understand that he wants to be fair to shareholders, but he should also be fair to shareholders who do not want to sell.  At their size, it is a mistake not to be buying shares here.  There are very few current opportunities to deploy significant sums at high rates of return and buying shares is one of them.

[xo 1]

Jay21:  You have captured well my frustration with the desire to "be fair" to all shareholders.  If shareholders want to sell, there is sufficient market for them to sell in any event whether to BRK or a third party.  If some current shareholder isn't dissuaded by the fact that WEB is buying his or her shares, then I don't see the benefit of trying to protect them from themselves. 

 

I'm hoping, but don't expect, that share buybacks will become an ever larger arrow in BRK's quiver.  I believe that well timed share buybacks are one of the largest advantages BRK possesses over a mutual fund or ETF.  Indeed, I'm hoping the company goes to an even more pronounced discipine - horde cash and wait for profound market dislocations like 2008.  In the interim, buyback shares and grow existing organic businesses.  We've seen enough market dislocations in the last 15 years to suggest that another one will come around soon enough.  To the topic, I think that formula can payoff handsome long term but may well make it hard to consistently grow BV above the SP rate.  I believe that such an approach would grow IV soundly above the rate of the SP - albeit, as WEB points out, likely by muting the down years dramatically and lagging in the super hot years.

[wknecht]

Where are the details of this test disclosed?  I must have missed it.

It's Principle #9 in the owner's manual: http://www.berkshirehathaway.com/ownman.pdf