Berkshire Hathaway updated its share repurchase program Tuesday to eliminate its previous rule that it would buy back shares only at a price less than 20% above book value.
Instead, the company will repurchase shares at any time they trade below Chairman and CEO Warren Buffett and Vice Chairman Charlie Munger’s “conservatively determined” estimate of intrinsic value. Berkshire Hathaway authorized its share repurchase program at 110% of book value in September 2011. It has acted on the plan once, buying 9,200 Class A shares for $131,000 each in 2012, when it increased its buyback restriction to 120% of book value.
Berkshire’s book value was $211,829 at the end of the first quarter, which means the share price would have to sink as low as $254,194 to come within the 120% threshold for repurchase under the previous authorization. One Class A share of Berkshire stock traded for $303,210 per share Wednesday, down 2.45% year to date.
Buffett has said previously that the company’s intrinsic value “far exceeds” its book value, signaling that the share price now could be closer to the amended line to trigger a buyback.
Berkshire also placed a second condition on its repurchases, saying that it would not buy back shares if it would reduce the value of Berkshire’s cash holdings and U.S. Treasury Bills below $20 billion. The company was sitting on $108 billion in cash at first quarter-end.
In the past, Buffett has applauded some types of corporate share repurchases. In his 2016 shareholder letter, he wrote:
“From the standpoint of exiting shareholders, repurchases are always a plus. Though the day-to-day impact of these purchases is usually minuscule, it’s always better for a seller to have an additional buyer in the market.
For continuing shareholders, however, repurchases only make sense if the shares are bought at a price below intrinsic value. When that rule is followed, the remaining shares experience an immediate gain in intrinsic value. Consider a simple analogy: If there are three equal partners in a business worth $3,000 and one is bought out by the partnership for $900, each of the remaining partners realizes an immediate gain of $50. If the exiting partner is paid $1,100, however, the continuing partners each suffer a loss of $50. The same math applies with corporations and their shareholders. Ergo, the question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent.”
A company should also avoid purchasing its shares when a business acquisition or other investment option “offers far greater value” than the undervalued shares, he said.
“My suggestion: Before even discussing repurchases, a CEO and his or her Board should stand, join hands and in unison declare, ‘What is smart at one price is stupid at another,’” Buffett wrote.
If Berkshire does decide to repurchase its shares, it will not happen until after its second-quarter earnings are released on Aug. 3.