Author Topic: Buffett buybacks: Could Berkshire tender stock?  (Read 36959 times)

xo 1

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #210 on: November 05, 2018, 12:27:38 PM »
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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 acquisitions 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.

I understand and respect the perspective.  The counter position, in my mind, is illustrated by the Great Financial Crisis.  Alice Schroeder has stated several times that, as well as Berkshire did with its investments in the GFC, it was not able to really back up the truck because of its bets on the equity indexes.  This has been explored already here:

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/interview-with-alice-schroeder/

I can't help but believe that Buffett hesitates to return capital because he remembers well what it felt like to be light on cash in a time of great opportunity.  From my portfolio's perspective, that is the greatest value of BRK - it is anti-fragile to the extent it has gobs of cash available in the next crisis.  If it starts to accept that the cash will never be investable, then it needs to undertake promptly a return of cash to shareholders.  BRK may still have a position among my investments in that event, but the thesis will be different.  But I reject that the time to make that determination is nearly a decade into a bull market.  I'm not suggesting that a crash is imminent - only that the absence of satisfactory large opportunities is not likely to be permanent.


xo 1

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #211 on: November 05, 2018, 12:38:23 PM »
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
Dr. Singleton had the "advantage" of being willing to take advantage of his shareholders.  One of the most powerful deterrents to BRK's repurchases has been a reticence to act greedily when the stock price was low.  I am ambivalent yet about whether to admire or regret the behavior - the loyalty of the shareholder base is a cardinal advantage.  If you start to treat them as arms'-length financial interests, you will surely lose that benefit.  Then, when the stock price sags, BRK risks a breakup at the very time it could be aggressively deploying its resources.  I appreciate why WEB dithers.  :-\

nickenumbers

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #212 on: November 05, 2018, 01:32:34 PM »

I understand and respect the perspective.  The counter position, in my mind, is illustrated by the Great Financial Crisis.  Alice Schroeder has stated several times that, as well as Berkshire did with its investments in the GFC, it was not able to really back up the truck because of its bets on the equity indexes.  This has been explored already here:

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/interview-with-alice-schroeder/

I can't help but believe that Buffett hesitates to return capital because he remembers well what it felt like to be light on cash in a time of great opportunity.  From my portfolio's perspective, that is the greatest value of BRK - it is anti-fragile to the extent it has gobs of cash available in the next crisis.  If it starts to accept that the cash will never be investable, then it needs to undertake promptly a return of cash to shareholders.  BRK may still have a position among my investments in that event, but the thesis will be different.  But I reject that the time to make that determination is nearly a decade into a bull market.  I'm not suggesting that a crash is imminent - only that the absence of satisfactory large opportunities is not likely to be permanent.

Now that make the most sense, rationally of all to me XO.  I don't know why WEB doesn't/didn't repurchase more of his own stock, but he might in the coming months.  If he doesn't, and if he has a view that he wants to have a HOG PILE of cash ready to move, your perspective still makes sense.  As Howard Marks says, we are in the 7, 8 or 9th inning of the game in our economy and a down turn WILL happen [who knows when]..  Having cash on hand might be handy.

I personally think that he should repurchase as much as he can while still maintaining a HOG PILE of cash.
The fastest Cheetah still waits for the lame baby antelope.  ..patience..

nickenumbers

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #213 on: November 05, 2018, 02:04:56 PM »
I just want to make sure that we all agree with each other on this “soft upper/lower limit” that I have read in the last couple of days regarding the BRK repurchase prices..  I appreciate the concept and the arithmetic that others have performed to derive it.  Thank you.

I think any discussion of such limits is moot, and too much time spent on it could be academic masturbation.  If the IV and BV of BRK is constantly changing and most likely increasing, the price at which BRK repurchased shares tells us something but not much at all as time passes.  If the IV is increasing BRK will do well to continue to purchase as the price vs value math is expanding.

I think trying to spend any exact precision on the purchase numbers and times/days, is probably a waste of time. 

Rather, I would argue, a 10K foot view of the events..  BRK is repurchasing shares, and BRK doesn’t make many mistakes in the pursuit of their own wealth accumulation.  The current prices resemble the prices that BRK paid, therefore we should all purchase the shares if we have a desire.  If prices continue to go up, that doesn’t necessarily make them a bad value, one must just continue to do the math on the IV.

What did I miss?  What do you guys think?
The fastest Cheetah still waits for the lame baby antelope.  ..patience..

longinvestor

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #214 on: November 05, 2018, 02:11:47 PM »
I just want to make sure that we all agree with each other on this “soft upper/lower limit” that I have read in the last couple of days regarding the BRK repurchase prices..  I appreciate the concept and the arithmetic that others have performed to derive it.  Thank you.

I think any discussion of such limits is moot, and too much time spent on it could be academic masturbation.  If the IV and BV of BRK is constantly changing and most likely increasing, the price at which BRK repurchased shares tells us something but not much at all as time passes.  If the IV is increasing BRK will do well to continue to purchase as the price vs value math is expanding.

I think trying to spend any exact precision on the purchase numbers and times/days, is probably a waste of time. 

Rather, I would argue, a 10K foot view of the events..  BRK is repurchasing shares, and BRK doesn’t make many mistakes in the pursuit of their own wealth accumulation.  The current prices resemble the prices that BRK paid, therefore we should all purchase the shares if we have a desire.  If prices continue to go up, that doesn’t necessarily make them a bad value, one must just continue to do the math on the IV.

What did I miss?  What do you guys think?

Well said. I do agree with the choice of expression of yours Acad Mastu😂 Shareholders should be enjoying the 100% jump in operating earnings more than A M. Only with 4/5th of the resources deployed!


John Hjorth

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #215 on: November 05, 2018, 03:52:07 PM »
I just want to make sure that we all agree with each other on this “soft upper/lower limit” that I have read in the last couple of days regarding the BRK repurchase prices..  I appreciate the concept and the arithmetic that others have performed to derive it.  Thank you.

I think any discussion of such limits is moot, and too much time spent on it could be academic masturbation.  If the IV and BV of BRK is constantly changing and most likely increasing, the price at which BRK repurchased shares tells us something but not much at all as time passes.  If the IV is increasing BRK will do well to continue to purchase as the price vs value math is expanding.

I think trying to spend any exact precision on the purchase numbers and times/days, is probably a waste of time. 

Rather, I would argue, a 10K foot view of the events. ...

What did I miss?  What do you guys think?

In short, you and I don't agree.
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AdjustedEarnings

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #216 on: November 05, 2018, 03:57:24 PM »
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)

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down.

The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.
« Last Edit: November 05, 2018, 04:00:07 PM by AdjustedEarnings »

John Hjorth

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #217 on: November 05, 2018, 04:19:35 PM »
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)

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down.

The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.

With regard to taxes for the in fact controlling shareholder, globalfinancepartner's point is far from moot. It appears evident to me, that you're most likely holding your Berkshire position in an account, where you're not subject to taxes on dividends, and that this fact is indeed perhaps blinding you.
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AdjustedEarnings

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #218 on: November 05, 2018, 04:29:28 PM »
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)

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down.

The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.

With regard to taxes for the in fact controlling shareholder, globalfinancepartner's point is far from moot. It appears evident to me, that you're most likely holding your Berkshire position in an account, where you're not subject to taxes on dividends, and that this fact is indeed perhaps blinding you.

Sorry, I don't understand what you're saying. My point is exactly that taxes make dividends a bad idea. My math I showed supports that. So I'm not sure why I gave you the impression that I don't care about taxes. It's the opposite. Of course, to a policy question of what BRK should do, how I own my shares shouldn't matter... but even so, I do own them in a taxable account. In fact Berkshire is the type of thing you'd WANT in a taxable account (at least if you live in the US).... no dividends, long term gains, etc. all play well with the current tax law here.

John Hjorth

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #219 on: November 05, 2018, 04:57:14 PM »
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)

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down.

The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.

With regard to taxes for the in fact controlling shareholder, globalfinancepartner's point is far from moot. It appears evident to me, that you're most likely holding your Berkshire position in an account, where you're not subject to taxes on dividends, and that this fact is indeed perhaps blinding you.

Sorry, I don't understand what you're saying. My point is exactly that taxes make dividends a bad idea. My math I showed supports that. So I'm not sure why I gave you the impression that I don't care about taxes. It's the opposite. Of course, to a policy question of what BRK should do, how I own my shares shouldn't matter... but even so, I do own them in a taxable account. In fact Berkshire is the type of thing you'd WANT in a taxable account (at least if you live in the US).... no dividends, long term gains, etc. all play well with the current tax law here.

AdjustedEarnings,

Frankly, to me, you appear indisposed right now. For Mr. Buffett, the taxes on a dividend would reduce his donation capacity, measured in absolute USD [his 2006 pledge with amendments does not - as far as I can see - exclude him from suggesting a dividend though].

-Where do you think Mr. Buffett wants the money to go? - To the five foundations, or to the US IRS?
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai