Berkshire Hathaway Hints Share Buybacks Could Happen Soon

&l;p&g;Berkshire Hathaway updated its share repurchase program Tuesday to eliminate its previous rule that it would buy back shares only at a price less than 20% above book value.

Instead, the company will repurchase shares at any time they trade below Chairman and CEO&l;span&g;&a;nbsp;&l;/span&g;Warren Buffett&a;nbsp;and Vice Chairman&l;span&g;&a;nbsp;&l;/span&g;Charlie Munger&a;rsquo;s &a;ldquo;conservatively determined&a;rdquo; estimate of intrinsic value. Berkshire Hathaway authorized its share repurchase program at 110% of book value in September 2011. It has acted on the plan once, buying 9,200 Class A shares for $131,000 each in 2012, when it increased its buyback restriction to 120% of book value.

Berkshire&a;rsquo;s book value was $211,829 at the end of the first quarter, which means the share price would have to sink as low as $254,194 to come within the 120% threshold for repurchase under the previous authorization. One Class A share of Berkshire stock traded for $303,210 per share Wednesday, down 2.45% year to date.

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Buffett has said previously that the company&a;rsquo;s intrinsic value &a;ldquo;far exceeds&a;rdquo; its book value, signaling that the share price now could be closer to the amended line to trigger a buyback.

Berkshire also placed a second condition on its repurchases, saying that it would not buy back shares if it would reduce the value of Berkshire&a;rsquo;s cash holdings and U.S. Treasury Bills below $20 billion. The company was sitting on $108 billion in cash at first quarter-end.

In the past, Buffett has applauded some types of corporate share repurchases. In his 2016 shareholder letter, he wrote:

&a;ldquo;From the standpoint of exiting shareholders, repurchases are always a plus. Though the day-to-day impact of these purchases is usually minuscule, it&a;rsquo;s always better for a seller to have an additional buyer in the market.

For continuing shareholders, however, repurchases only make sense if the shares are bought at a price below intrinsic value. When that rule is followed, the remaining shares experience an immediate gain in intrinsic value. Consider a simple analogy: If there are three equal partners in a business worth $3,000 and one is bought out by the partnership for $900, each of the remaining partners realizes an immediate gain of $50. If the exiting partner is paid $1,100, however, the continuing partners each suffer a loss of $50. The same math applies with corporations and their shareholders. Ergo, the question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent.&a;rdquo;

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A company should also avoid purchasing its shares when a business acquisition or other investment option &a;ldquo;offers far greater value&a;rdquo; than the undervalued shares, he said.

&a;ldquo;My suggestion: Before even discussing repurchases, a CEO and his or her Board should stand, join hands and in unison declare, &a;lsquo;What is smart at one price is stupid at another,&a;rsquo;&a;rdquo; Buffett wrote.

If Berkshire does decide to repurchase its shares, it will not happen until after its second-quarter earnings are released on Aug. 3.

Berkshire Hathaway shares rose 5.1% Wednesday. The company has a price-earnings ratio of 12.53 and price-book value of 1.42.

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