Berkshire to Buy Back Shares as Cash Tops $40B

By Andrew Frye - Sep 26, 2011 11:02 PM GMT+0700
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Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., speaks during an interview on July 8, 2011. Photographer: Scott Eells/Bloomberg

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Sept. 26 (Bloomberg) -- Keith Wirtz, chief investment officer at Fifth Third Asset Management Inc., talks about Berkshire Hathaway Inc.'s share buyback plan and investment strategy. Berkshire Hathaway said it will repurchase shares for as much as 110 percent of their book value, saying the stock is undervalued after falling 17 percent this year. Wirtz speaks with Betty Liu, Jon Erlichman and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), which has shunned buybacks for four decades, will repurchase shares for as much as 110 percent of their book value, saying the stock is undervalued after falling 17 percent this year. Berkshire jumped in New York trading.

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

Buffett, 81, previously preferred 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 Sept. 23 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 percent to $105,725 at 11:42 a.m. in composite trading. The stock dropped below $100,000 on Sept. 22 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. (GE) has set a date of Oct. 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.

Buffett said in February that his firm was able to invest $15.6 billion in the 25 days after Lehman Brothers Holdings Inc.’s 2008 bankruptcy because Berkshire was so committed to accumulating capital to seize opportunities at times of distress.

“Not a dime of cash has left Berkshire for dividends or cash repurchases during the past 40 years,” Buffett wrote in his most recent annual letter. “Instead, we have retained all of our earnings to strengthen our business, a reinforcement now running about $1 billion per month.”

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net