Buffett buyback makes Berkshire a core holding

The plan suggests the Oracle of Omaha views his company's stock as undervalued.

By TheStockAdvisors Oct 28, 2011 9:49AM
By Ian Wyatt, 100K Portfolio

Earlier this month, Warren Buffett announced an "open-ended" share-buyback program for Berkshire Hathaway (BRK-B), which allows it to repurchase its buy stock at a price not to exceed 10% above book value.

The program is a huge positive for Berkshire shareholders and effectively puts a floor on Berkshire's share price.

The program was initiated immediately and has no expiration date. Additionally, the program allows Berkshire to repurchase an unlimited number of shares, so long as the company has at least $20 billion in cash and equivalents on its balance sheet.

Berkshire Hathaway has never repurchased shares. Nor has the company ever paid a dividend to its shareholders.

In 1999, when Berkshire shares were in the toilet during the technology and dot-com boom, Buffett made an open offer to buy Berkshire shares at the current price.

Within one week, Berkshire shares had risen 24%. And one year later the stock had soared 72%, compared with an 11% decline for the S&P 500 index. As a result, Buffett never had the opportunity to buy back shares.

The Oracle of Omaha is known to be a straight shooter who puts his shareholders first. If there is a single corporate executive I trust, it's Buffett. I suspect I'm not alone in this view.

And it's fair to assume that the announcement of the repurchase program isn't designed simply to boost Berkshire's share price in the short term.

After all, Buffett has made it clear through his past actions that he doesn't really care what happens in the near term for the price of Berkshire shares or his other investors.

This announcement tells me that Buffett believes Berkshire shares are considerably undervalued.

Today, Berkshire is sitting on piles of cash. At the end of the second quarter, cash and short-term bonds totaled $77 billion. The total value of the cash equals one-third of the company's current market cap.

In addition to its huge war chest of cash, Berkshire has amazing cash flow from its operations. In the first six months of this year, cash from operations was $6.5 billion. This means that every month more than $1 billion in cash is pouring into the company's coffers!

Simply put, Berkshire is a cash-generating machine that's seeking to maximize shareholder value.

Based on our assessment, we believe Berkshire shares would need to rise 35% in order to reach their intrinsic value today.

With Berkshire shares trading at 65 cents on the dollar based on my estimates, I'm buying more Berkshire Hathaway B shares and consider this a core holding in our model portfolio.

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6Comments
Oct 30, 2011 3:14AM
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SO much negativity.  Instead of whining, why dont you read the article.  Buffet is setting up a program to buyback "unlimited" shares, sitting on hordes of cash, mulling the possibility of a dividend, and the stock is extremely undervalued based on fundementals.  Half of you get blinded by your own incompetence to see when a stock is about to go up 50%
Oct 28, 2011 1:08PM
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The end of the article has a math inconsistency. If the shares are trading at 74 cents on the dollar, they would need to rise 35% to reach their intrinsic value (a dollar on the dollar). If the shares are trading at 65 cents on the dollar, they would need to rise 54% to reach their intrinsic value.

Oct 28, 2011 7:20PM
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SmileHi, Mr. Buffett is a man that is able to make money when other people are losing money, that would make other people either Love or hate him, I like Mr. Buffett , he is a Capitalist, and a really good merchant!
Oct 28, 2011 7:39PM
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brka has done nothing for years.  Its a dead stock.  Buffet?  Well, he really should retire and eliminate his name from the Company if he wants to campaign for Obama & Co. 
Oct 28, 2011 4:39PM
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Buffet is a cancer, he likes Obama because he can move him around like a puppet.  Make back door deals in the White House then throw a little fund raiser party for Obama & everyone looks the other way.  Buffet is steering this economy.  This is nothing but a big Monopoly game for him.  He's got all the money & all the properties.  He should take all his money & go far away.  He is nothing but a tumor in this country"s recovery effort. 

 

 

Oct 28, 2011 3:47PM
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Wow.  Fredrick Michael points out an obvious math error in his post and the 'thumbs' are running two to one against him.          

Wonder how badly i'll gets 'thumbed down' for pointing out that this article is an obvious shill for buffett.  The writer is an embarrassment to his (alleged) trade.  At this point we all know that buffett has been recently caught in numerous outrageous lies (ex.  'my secretary pays a higher tax rate than I do.'  blatant lie).  We know that since Obama became president, buffett was involved in several 'deals' that could at best be termed 'extreme sweetheart' and more honestly called insider or in some cases financial extortion.  And the list goes on, and on, and on.  And now 'alleged' financial writers are shilling for him in bogus articles like this?  God help us.

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