Berkshire to buy back shares

Warren Buffett’s Berkshire Hathaway Inc will repurchase shares for as much as 110 per cent of their book value, saying the stock is undervalued after falling 17 per cent this year. The shares jumped in New York trading.

“The underlying businesses of Berkshire are worth considerably more than this amount,” the Omaha, Nebraska-based company said on Monday in a statement. “If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares.”

Buffett, 81, previously shunned share buybacks, preferring to use the firm’s profits to buy companies and securities. The growth of Berkshire’s cash hoard makes it harder to effectively invest the proceeds, Buffett told investors at the company’s annual meeting in April.

 

“He thinks the stock is cheap and he’s putting his money where his mind is,” said Jeff Matthews, a Berkshire shareholder and author of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett.”

Berkshire’s A shares closed at $100,320 on Friday on the New York Stock Exchange. The book value, a measure of assets minus liabilities, is about $98,700 a share, according to data compiled by Bloomberg. Buffett’s firm may repurchase both A and B shares, according to the statement, and buybacks won’t be made if they reduce consolidated cash holdings below $20 billion.

Share Rebound
Class A shares climbed 5.4 per cent to $105,740 at 9.46 am in composite trading. The stock dropped below $100,000 on Thursday for the first time in 20 months after natural disasters including the Japan earthquake pressured reinsurance units and equity-market declines hurt Buffett’s derivative bets.

“At certain times in the past, I have erred in not making repurchases,” Buffett told shareholders in a letter published in 2000. “My appraisal of Berkshire’s value was then too conservative or I was too enthused about some alternative use of funds.”

Berkshire had about $47.9 billion in cash as of June 30, and General Electric Co has set a date of October 17 for a $3.3-billion payment to repurchase preferred stock sold to Buffett’s firm in 2008. Berkshire this month completed the acquisition of engine additives maker Lubrizol Corp for about $9 billion.

Buffett has said interest rates near record lows reduce the attractiveness of new fixed-income investments.

‘Different Tools’
“As the firm has grown in scale and reach, they’re going to have to employ different tools than the ones got them here,” said Thomas Russo, a partner at Berkshire investor Gardner Russo & Gardner. “One of them is shareholder buybacks.”

Buffett said in the letter that only one combination of facts justifies share buybacks.

“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,” he wrote.