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Apr 25, 2019

Buffett preps Berkshire shareholders for soaring stock buybacks

Warren Buffett

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Warren Buffett’s Berkshire Hathaway Inc. (BRKa.N) started snapping up its own stock last year after loosening the company's buyback policy. Now the billionaire investor is signaling a lot more to come.

After US$1.3 billion in repurchases during 2018, the eventual total could soar to as high as US$100 billion, Buffett said in a Financial Times interview published Thursday, without giving a time frame. The remarks build on the chief executive officer's annual letter to shareholders in February, when he said Berkshire was likely to eventually become a “significant” buyer of its own stock.

As shareholders prepare to flock to Omaha, Nebraska, next week for the company's annual meeting, they're starting to confront a growing possibility: Berkshire itself could be on the other side of the trade if they choose to sell.

“So long as he continues to communicate the strategy effectively and investors know and understand what to expect, I think that they won’t be disappointed,” James Shanahan, an analyst at Edward Jones & Co., said in a phone interview. “He’s been disciplined with the strategy even though he’s modified it a couple times now.”

New Policy

Berkshire’s board announced the policy change last July, a tweak that allows Buffett and his business partner, Charles Munger, to buy back stock whenever the price is below Berkshire’s intrinsic value. Previously, they couldn’t make repurchases if the price was more than 20 per cent above current book value.

Buffett devoted a chunk of this year’s letter to shareholders to describe how repurchases should be “price-sensitive” because buying overpriced shares destroys value. For years, he’s emphasized the discipline around repurchases, but Berkshire’s stock kept climbing and his previous policy effectively set a floor.

Last year’s repurchases made barely a dent in Berkshire’s US$112 billion cash pile. While an enormous mountain of money can be viewed as a good problem to have, the war chest highlights some of the challenges Buffett is facing. He's struggled to find large, reasonably priced acquisitions that move the needle for his US$518 billion conglomerate. And shifting his US$173 billion equity portfolio into different stocks that generate higher returns can be a challenge, one Buffett’s compared to dancing “like an elephant.”

“All this excess cash is a drag on earnings,'' Shanahan at Edward Jones said. ``There’s a lot of earnings power here at this company if they can put capital to work.''

Berkshire’s 2018 buybacks are dwarfed by the sums at other large companies. Bank of America Corp. (BAC.N), which counts Berkshire as its largest shareholder, bought back around US$45 billion of its stock on a gross basis since 2013.

Berkshire is wading deeper into buybacks at a time when the strategy is becoming more politically fraught. Democratic senators including New York's Chuck Schumer and Bernie Sanders of Vermont are among the critics arguing that corporations should limit buybacks because they disproportionately benefit the wealthy.

For Berkshire, there’s also concern about its fiercely loyal shareholder base. Buffett has described them as “co-venturers” rather than “faceless members of an ever-shifting crowd.” That’s fed into his philosophy on buybacks and how he seeks to make sure his investors are treated well.

“We do not want a partner to sell shares back to the company because he or she has been misled or inadequately informed,” Buffett said in his February letter.

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