Why has the world's most renowned investor just spent $1 billion buying shares in his own company?
Who is Warren Buffett?
Many regard him as the best investor in history. If you had bought £250 of shares in his investment company Berkshire Hathaway in 1965, they’d be worth about £5 million today. Not bad really.
So, what’s happened?
Buffett has spent $1 billion (£770 million) buying back shares in Berkshire Hathaway. Share or stock buybacks are the repurchasing of stocks or shares (same thing) by the company that issued them to public and private investors - either from the open market or from shareholders directly. That’s pretty straightforward.
But opinion is divided on whether they are good or bad for investors.
Why is Berkshire Hathaway’s buyback interesting?
It could suggest that Buffett can’t find good value stocks to put his money into. And also that he thinks shares in his own fund are underpriced. But it is a move he has typically spurned.
In an interview with Bloomberg TV in August he said fear in the market “creates prices that make me want to shovel out the money as fast as I can. But we’ve been shovelling out money anyway”.
Is he right to think the stock is undervalued?
We can’t answer that, but the move came alongside results that showed its operating profit had doubled in the third quarter to $6.88 billion from $3.44 billion in the same quarter last year.
Berkshire Hathaway loosened its policy on stock buybacks in July. The new policy lets Buffett and vice chairman Charlie Munger authorise buybacks when both believe the repurchase price is “below Berkshire’s intrinsic value,” a determination that would be made “conservatively”.
Does it mean the stock market overall is poor value?
Not necessarily. Buffett is notoriously fussy about which shares he buys. He is always searching for “value” stocks – ones that are trading at a price well below what the company’s performance would suggest.
He also buys stocks very infrequently. Berkshire bought up more Apple shares in August (though he said he’d like 100%). Other than that it has not bought anything since buying aircraft parts maker Precision Castparts in August 2015 for $32.3 billion.
Also Berkshire still has 30% of its funds in equities as at the end of the third quarter of 2018.
That doesn’t sound very much – other funds have far more in the stock market, don’t they?
Yes, but Berkshire also has more than 50% invested in unlisted, private companies, big and small. Also 30% is at the high end of what Berkshire historically has held in equities (the most it has ever held is 32% in early 1999). So it would appear Buffett has some confidence in the stock market – the US one at least.
Is $1 billion a lot for Buffett?
Not when you compare it to Berkshire Hathaway’s $104 billion cash pile.
Are share buybacks good or bad for investors?
‘If you own a few shares and the business decides to buy some back, that could be seen as great news,’ says millennial investment specialist Ben Arnold.
‘The idea being that after the buyback there’s less shares to go around, so the ones you still own go up in value. The reality isn’t always that simple though. For instance, if the company’s management are buying back shares because they don’t see any profitable opportunities to spend the business’ cash, then this may be bad news for those expecting the company to grow.’
He says: ‘It really matters why management have decided to buy back shares in the first place, which can be tricky to work out. Professional investors will try and do this by meeting chief executives and questioning them, while also looking at company accounts and the firm’s track record.’