Berkshire Hathaway Share Buyback: Investor Takeaway

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Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B) said today (Wednesday) it authorized the repurchase of $1.2 billion worth of Class A shares from "the estate of a longtime stockholder."

Berkshire Hathaway said it paid $131,000 a share for 9,200 shares.

At the same time, Berkshire Hathaway announced the board of directors had approved an increase in the price it is willing to pay for Berkshire shares from 110% of book value to 120%. Based on Berkshire Hathaway's book value per Class A share of $111,718 at the end of September, the company is now willing to pay up to $134,061 to repurchase shares.

Both Class A and Class B shares rallied this morning following a delayed open at the request of the company, pending news. In late-morning trading, both Class A shares and Class B shares were up by 2.4%.

The move surprised investors – but says a lot about what Buffett thinks of Berkshire's value.

Here's why.

Why Buffett Changed His Mind on BRK

Buffett surprised the markets back in 2011 when he changed his mind on share buybacks, which he had disparaged as a waste of money for most of his career.

In September 2011, he set parameters under which he would be willing to buy back Berkshire Hathaway shares, saying he would pay no more than 110% of book value.

When he initially announced the share buybacks in September 2011, Buffett asserted "repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest." Buffett said, "Continuing shareholders are hurt unless shares are purchased below intrinsic value."

Clearly, Buffett has decided Berkshire Hathaway's intrinsic value is higher than he originally estimated.

If the estate that sold the Berkshire Class A shares had gone to sell them into the market, it might well have taken the price sharply lower. The Class A shares buyback amount, $9,200, is equal to almost 16 days of average trading volume, excluding the 2,100 shares traded so far today, which is about four times the average daily volume.

Also, with the $1.2 billion price, it is highly unlikely there could have been another buyer or group of buyers willing to take on a position of that size.

The seller wanted to maximize his return, and Berkshire Hathaway wanted to prevent a sharp decline in its share price.

Given that Buffett had committed Berkshire Hathaway to share buybacks last year, the company would have probably gone into the market to support the share price at 110% of book value ($122,889) anyway.

By stepping up to the plate and raising the share repurchase price today, Buffett has gotten himself a lot of happy shareholders. And we can be reasonably certain that the Sage of Omaha thinks his Berkshire Hathaway shares are worth a lot more than 120% of book value.

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  1. Dave Martin | December 13, 2012

    Intrinsic value is ultimately a subjective estimate. It is possible that using the same metrics for calculating it, Buffett concluded that the intrinsic value has increased significantly more than has Berkshire's book value. After the BRK was added to the S&P500, I would have been willing to sell my -B shares if a buying frenzy had pushed the price over $100. I wouldn't sell at that price today.

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