Should Warren Buffett Buy Back Shares Of Berkshire Hathaway?

Warren Buffett has always been a fan of buying undervalued stocks. Buffett has made a number of acquisitions over the past few years as he looked to take advantage of the weakness in equity prices. Now shares of Buffett’s own Berkshire Hathaway (BRK-A) are trading at a discounted level and have a hold rating on the stock by numbers of analysts. Both Buffett and Charles Munger are surprised that the stock is trading so cheaply. Is now the right time for Warren Buffett to issue a buy back at Berkshire Hathaway?

Berkshire Hathaway has its finger on the pulse of just about every single sector in the economy including insurance, finance, manufacturing, railroads, utilities, retail, consumer products, and energy. The holding company has been taking it on the chin recently with all of the insurance related calamities around the globe. Insurance companies like Berkshire’s subsidiaries make a ton of money when times are good. They also lose a lot of money paying out claims when disasters occur. Insurance losses  reduce the amount of float that the company has which cuts into Berkshire’s investment income.

Berkshire Hathaway Stock

Shares of Berkshire Hathaway look reasonable cheap right now. The stock is down almost 8% year to date and over 5% for the past year. Berkshire Hathaway’s Class A shares currently trade at $110,000 per share. I know that looks like a big number but it is actually low for Berkshire Hathaway. This is a stock that easily moves $500 to $1,000 in price on a given day. Class B shares are more affordable for most investors since they trade at only $74.

Berkshire has not traded at this level since June of 2010. The stock now trades at 1.1 times the stated book value and just 10 times cash flow. Berkshire trades at 1.3 times sales and has a low debt to equity ratio of 0.4. The company remains a cash cow which lots of capital to deploy. Berkshire has one of the best balance sheets in the market. The 5 year growth rate for the stock is decent at 21%.

If Buffett think that shares of Berkshire Hathaway are cheap then he should consider starting a stock buyback program. Since Berkshire does not pay a dividend, a stock buyback is one of the few ways that investors could see some long term stock appreciation.

As you can tell from the site’s name I am a fan of Warren Buffett’s but I do think that his company will have difficulty producing significant growth in the future. I don’t blame Buffett for the low growth at the company. Berkshire’s biggest problem is one that many large cap stocks face. It is hard to move the needle on growth when a company has market cap of $185 billion dollars. Large investments for most companies like the $9 billion dollar acquisition of Lubrizol are now not so huge for Berkshire given its massive size.

A stock buyback plan might be just the move to unleash some of the hidden value in Berkshire’s shares.

Disclosure: I do own shares of Berkshire Hathaway.

Comments

  1. avatar Ginger says:

    I’m waiting till Buffet passes to buy some Berkshire Hathway stock. I think the people he trained are good and that the stock will continue to rise even after his death but I think people will freak out when he no longer is in control and it will drop like a rock.

    • @Ginger – I doubt it. People that own BRB are value investors and buy-and-hold investors, so they won’t jump the ship that easily.

      I have 10% of my total equity in BRK and have no intentions of letting it go anytime soon.

  2. I don’t think they will buy back shares. Buffet has always been willing to sit on cash for as long as necessary so that he can strike when he finds a great deal. Buying his own stock means he loses the cash, so the stock may rise but he hasn’t done his job (which is to find great companies to purchase).

  3. If he truly thinks it is under-valued, and he can’t find a good deal elsewhere, then yes he should buy back shares or return money to shareholders. He has always stated this. My guess is he is looking and will find a good use for his money.

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