Buffett buybacks: Could Berkshire tender stock?

[John Hjorth]

I'm not sure where I got 8 days from, I've been out all day.  Perhaps it was an error in reading my notes.  More likely, with the price cap that appears to have been in place, it was 11 trading days.  If I remember what the hell I was thinking about when I wrote that I'll let you know..

But, yeah, as mentioned earlier - the 10Q on page 45 says, "Period"  "August 7 through August 24:"

And he had mentioned in the original announcement that he would wait until everyone had the same information (after earnings were publicly released).  Then he apparently waited one additional day, potentially for the reason I speculated in my previous post.

The gist is that Berkshire isn't buying back anywhere close to 25% of the average daily volume.  And there appears to be a price cap, likely based on a multiple of book value so it may change quarter to quarter.  Did the 'soft floor' just become a 'soft ceiling' ?  LOL

Thank you, globalfinancepartners, & my question #1 does not really matter, what had me really puzzled, was my question #2, which has been answered satisfactory by longinvestor. The whole thing makes sense to me now, actually, in the meaning that we're not any longer held in the dark. We have now black on white, that Berkshire has been buying back at average 207ish for the B share. That's sufficient for me.

[John Hjorth]

The exact level of buybacks might not be clear, but what is clear is that it amounts to bugger-all in the context of BRK's cash balances.  The finished the quarter with, what, $95 billion in cash and short term investments?  So dropping a bil on buybacks hardly constitutes an aggressive, high conviction move.

I say either get serious about deploying some of that cash on buybacks, or institute a considerable cash dividend.  Buying Apple sharss soaked up some cash, but it really doesnt inspire confidence in management given previous observations about circle of competence.


SJ

If he doesn't make a sudden surprise tender like I originally speculated (and that's a low probability), it's hard to draw any other conclusions from this than that dividends are way closer than previously suspected. Barring an -08 type drawdown the idle cash will keep growing at a rapid clip. A luxurious problem to have, but these puny buybacks don't even offer a partial solution.

StubbleJumper & alwaysinvert,

How do you feel and think about the whole thing today Monday?

- In a time context, your posts was just after the Berkshire 10-Q was released. Now we have had ongoing discussion during the weekend and analysis of the 10-Q, and it has come up that about ~USD 15B has been allocated to financials during 2018Q3 [- of the ~USD 15 B ~USD 6 B allocated to BAC -], on top of the share buyback of ~USD 1 B in the quarter.

Furthermore considerations/speculations [ time will tell ] that more capital has been allocated to perhaps BK, USB & GS, perhaps even new positions in financials.

Personally, I was a bit disappointed just after the release of the 10-Q, too. After a couple of nights sleep on it, I have a good feeling about this here Monday morning. The upward trend in liquidity surplus has been turned, and Berkshire is still the Rock of Gibraltar. All in all, not that bad, because it's actually able to generate good earnings and cash flow as it is.

[alwaysinvert]

The exact level of buybacks might not be clear, but what is clear is that it amounts to bugger-all in the context of BRK's cash balances.  The finished the quarter with, what, $95 billion in cash and short term investments?  So dropping a bil on buybacks hardly constitutes an aggressive, high conviction move.

I say either get serious about deploying some of that cash on buybacks, or institute a considerable cash dividend.  Buying Apple sharss soaked up some cash, but it really doesnt inspire confidence in management given previous observations about circle of competence.


SJ

If he doesn't make a sudden surprise tender like I originally speculated (and that's a low probability), it's hard to draw any other conclusions from this than that dividends are way closer than previously suspected. Barring an -08 type drawdown the idle cash will keep growing at a rapid clip. A luxurious problem to have, but these puny buybacks don't even offer a partial solution.

StubbleJumper & alwaysinvert,

How do you feel and think about the whole thing today Monday?

- In a time context, your posts was just after the Berkshire 10-Q was released. Now we have had ongoing discussion during the weekend and analysis of the 10-Q, and it has come up that about ~USD 15B has been allocated to financials during 2018Q3 [- of the ~USD 15 B ~USD 6 B allocated to BAC -], on top of the share buyback of ~USD 1 B in the quarter.

Furthermore considerations/speculations [ time will tell ] that more capital has been allocated to perhaps BK, USB & GS, perhaps even new positions in financials.

Personally, I was a bit disappointed just after the release of the 10-Q, too. After a couple of nights sleep on it, I have a good feeling about this here Monday morning. The upward trend in liquidity surplus has been turned, and Berkshire is still the Rock of Gibraltar. All in all, not that bad, because it's actually able to generate good earnings and cash flow as it is.

Nothing has changed. The further allocation towards BAC is a one time thing. The 10% limit is probably pretty much reached so that position now can't soak up further capital. Neither GS nor USB have potential to soak up that much capital either. From what Google tells me, the GS stake was $3b and USB was $5b in Q2 - by eyeglancing their market caps the maximum further allocation towards them is something like $8-9b combined. BK maybe makes for an additional $1.5b.

If there is no new bank/insurance stock position that explains the Q3 transactions and is pretty much it. We are back to square one in a quarter or two with regards to the cash.

He would need a non-financial stock with preferably a market cap in the several hundreds of billions to really make a difference (even more AAPL has not seemed enticing enough at recent prices). Or an acquisition in the +30b class, the last of which he made in 2015.

[John Hjorth]

Thanks, alwaysinvert,

Your post actually triggers me thinking that I'm personally biased here, because I haven't bought anything american but Berkshire and [Big] US banks for the last 1½ years or so, [which is what Mr. Buffett here has done]. [I have bought some MKL & FFH too in that time span though, but that was more a matter of portfolio alignment, while something else got sold.]

And, yes, the forward time horizon under which to assess this situation matters.

[gfp]

dividends are way closer than previously suspected

It really does seem like Warren's been really clear in pointing out that cash dividends do not make sense with Berkshire trading above book value.  A dollar of after-tax earnings is worth less than a dollar if sent out in a cash dividend, or more than a dollar if retained.  Despite there bing a ceiling price on their repurchase plan, I do think repurchases are the way he will go.  And, of course, cash hasn't piled up the way many would have expected.  We're still here at $100 Billion.  One of these days he's going to buy a decent sized company.

[Cigarbutt]

http://www.rationalwalk.com/?p=16931
Interesting perspective and a few backward and forward looking questions.

[StubbleJumper]

The exact level of buybacks might not be clear, but what is clear is that it amounts to bugger-all in the context of BRK's cash balances.  The finished the quarter with, what, $95 billion in cash and short term investments?  So dropping a bil on buybacks hardly constitutes an aggressive, high conviction move.

I say either get serious about deploying some of that cash on buybacks, or institute a considerable cash dividend.  Buying Apple sharss soaked up some cash, but it really doesnt inspire confidence in management given previous observations about circle of competence.


SJ

If he doesn't make a sudden surprise tender like I originally speculated (and that's a low probability), it's hard to draw any other conclusions from this than that dividends are way closer than previously suspected. Barring an -08 type drawdown the idle cash will keep growing at a rapid clip. A luxurious problem to have, but these puny buybacks don't even offer a partial solution.

StubbleJumper & alwaysinvert,

How do you feel and think about the whole thing today Monday?

- In a time context, your posts was just after the Berkshire 10-Q was released. Now we have had ongoing discussion during the weekend and analysis of the 10-Q, and it has come up that about ~USD 15B has been allocated to financials during 2018Q3 [- of the ~USD 15 B ~USD 6 B allocated to BAC -], on top of the share buyback of ~USD 1 B in the quarter.

Furthermore considerations/speculations [ time will tell ] that more capital has been allocated to perhaps BK, USB & GS, perhaps even new positions in financials.

Personally, I was a bit disappointed just after the release of the 10-Q, too. After a couple of nights sleep on it, I have a good feeling about this here Monday morning. The upward trend in liquidity surplus has been turned, and Berkshire is still the Rock of Gibraltar. All in all, not that bad, because it's actually able to generate good earnings and cash flow as it is.

John,

Since the beginning, I have been skeptical of the Apple position because it struck me as outside of WEBs circle of competence and it has always struck me as a desperate move to deploy a large amount of cash.  The catalyst for that move has never quite been obvious to me -- what has Apple done in the past 12 or 18 months that suddenly merited such a large chunk of shareholders' capital?  The price didn't plunge rapidly to make it a 50 cent dollar.  Nope it was bought on fundamentals and operating results.  But, after racking up $110B± of cash it looks like brk is grasping for reasons to not initiate a healthy sized dividend or to not buy back a large slug of shares.

Turning to the purchase of large US financial companies (banks), nearly everybody on this board took a high conviction position about 5 or 6 years ago and we have made out like bandits.  The banks are still a buy, IMO, but are not as cheap as when we were all pounding on the table about BAC or JPM back in '11 or '12.  So why is brk suddenly taking a high(er) conviction position in the banks right at this moment?  A what point during the past five or so years were the US banks not an obvious purchase?  To be blunt, it was value in plain sight.  How did brk accumulate $110B± of cash when the banks have been an obvious outlet to deploy cash for the past 20 or so quarters?

The actions of the past year or so have struck me as a desperate effort to deploy cash and deny a basic reality.  That reality is that cash from ops is basically $40b per year.  Take off something for maintenance capex, new plant and equipment, and opportunistic acquisitions and you're looking at reasonably reliable cash surplus of about $20b per year.  The opportunities to deploy that much capital on an ongoing basis are not available in sufficient quality and high enough expected return to continue retaining 100 percent of earnings.


SJ

[ugadawg_98]

Don’t know if anyone else has posted this, but it’s worth a read. I note that WB has spoken favorably of Dr Singleton in the past, and since this thread was started regarding the possibility of a tender, this article seems relevant:

http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Singleton-and-Teledyne-A-Study-of-an-Excellent-Capital-Allocator.pdf

[alwaysinvert]

dividends are way closer than previously suspected

It really does seem like Warren's been really clear in pointing out that cash dividends do not make sense with Berkshire trading above book value.  A dollar of after-tax earnings is worth less than a dollar if sent out in a cash dividend, or more than a dollar if retained.  Despite there bing a ceiling price on their repurchase plan, I do think repurchases are the way he will go.  And, of course, cash hasn't piled up the way many would have expected.  We're still here at $100 Billion.  One of these days he's going to buy a decent sized company.

He has done two really significant acqusitions in the last 10 years (BNSF and PCP), whereas he would need one of those on average *every year* to motivate retaining all earnings in the future. Repurchases are an alternative possibility but the price (and size) he has done them at thus far doesn't give any indication that they will come even close to solving the "problem". It's very easy math and the numbers are just too big at this point. By my estimation, something has got to give decently soon, whether that's the buyback price level or dividends.

A dollar retained is not worth a dollar if you retain it just because the alternative of paying it out means making it 70 cents through taxes. How many cents on the dollar would you pay to get a return of ~2% before inflation and taxes and not having any control over when you can have disposal of it? Whatever your answer to that question is right now is what the marginal dollar at BRK is worth, because all the evidence available points towards it being impossible to deploy internally except in bonds.

[gfp]

I guess my point is that $1 retained is worth more than $1 any time Berkshire trades for more than book value.  And if it trades close to or below book value, he would buy back as much stock as he could get his hands on.  If the company trades at 1.01x book value, by definition a dollar retained is worth more than a dollar paid out (not even taking taxation into account)