Author Topic: Buffett buybacks: Could Berkshire tender stock?  (Read 36966 times)

AdjustedEarnings

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #220 on: November 05, 2018, 06:00:19 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?

I don't understand what you're saying. I'm serious. I said dividends are a bad idea because of taxes. You said the same thing. WE ARE AGREEING. Yet, you are saying that I'm in disagreement with you somehow and indisposed? I am lost.


SwedishValue

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #221 on: November 06, 2018, 04:09:57 AM »
All right, so I admit to have been quite wrong on my most meaningful conclusion: that Buffett had been buying back stock close to the theoretical limit and also for prices above 210 USD. I re-read some of the stuff Buffett wrote on buybacks and again came across a segment from the 1999 letter to shareholders (p. 16-17): http://www.berkshirehathaway.com/letters/final1999pdf.pdf

Here, Buffett writes the following:

"There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the
company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business
and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated. To this we add
a caveat: Shareholders should have been supplied all the information they need for estimating that value. Otherwise,
insiders could take advantage of their uninformed partners and buy out their interests at a fraction of true worth.
We
have, on rare occasions, seen that happen. Usually, of course, chicanery is employed to drive stock prices up, not down." (my emphasis)

Is there an argument for Buffett now being able to repurchase more than the ca 8-9% of daily volume that he purchased during the days which he repurchased stock? My personal view of that is NO (since he wouldn't have repurchased to start with if he didn't feel like shareholders had been supplied with all the information they would need to estimate intrinsic value).

However, I'd like to hear your opinions on the matter.

globalfinancepartners

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #222 on: November 06, 2018, 04:50:35 AM »
He doesn't want to influence the price of the stock very much.  It is possible the price ceiling on the repurchase plan is tied to last reported book value, in which case it could be as high as 218 per B share currently.  But it is equally possible that the ceiling remains at 208 or whatever it is and Warren is just wanting to buy the stock cheaper than others believed.

The limiting factor on repurchases in the 3rd quarter was the price.  He would have repurchased a lot more stock if the price had stayed below the floor and their trader was able to be active every single trading day of the quarter.  As it happened, the trader was only able to purchase shares for 14 trading days during the 3rd quarter.

nickenumbers

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #223 on: November 06, 2018, 05:12:13 AM »
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

Great article UGADAWG,  thanks for sharing it.  I just started to read thru it.
The fastest Cheetah still waits for the lame baby antelope.  ..patience..

alwaysinvert

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #224 on: November 15, 2018, 02:01:21 AM »
Some of the cash problem has seemingly disappeared with the entry into JPM during Q3. Approximately $30b more could be deployed into that stock. Being a highly liquid stock ($1.5b worth of trading daily) this could be done relatively swiftly depending on price action. The stake bought in Q3 only corresponds to about 4% of the average daily volume - not all that aggressive. Presumably the purchases have continued into Q4 in light of recent prices compared to Q3.

I expect that this will top out at 10% just like the rest of the bank stocks, barring a sharp move up in price. It is a bit curious why they didn't keep this purchase secret for the time being, like they have done in the past when building large positions (IBM, XOM, some others lately?). Maybe that is a strike against my idea that they will build a maximum size position.

Anyhow, this could conceivably be counted as Buffett scoring an elephant, if in slightly different guise.

Dynamic

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #225 on: November 15, 2018, 02:44:00 AM »
I think the fall in the market from around Oct 10th to 26th was probably sufficient for them to really build their stakes quite aggressively at even better prices than those during Q3. Not sure whether it would be up to 10% of JPM, but I'd imagine they could have put a lot of capital to work in that period on stock purchases and Berkshire buybacks too.

globalfinancepartners

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #226 on: November 15, 2018, 04:29:16 AM »
I think the fall in the market from around Oct 10th to 26th was probably sufficient for them to really build their stakes quite aggressively at even better prices than those during Q3. Not sure whether it would be up to 10% of JPM, but I'd imagine they could have put a lot of capital to work in that period on stock purchases and Berkshire buybacks too.

Could be I guess.  We already know how many shares they repurchased up to October 25th.  Meaningful repurchase activity beyond that depends on if the "ceiling" price on the repurchase plan is adjusted with the increase in last reported book value, or if it stays the same at roughly $208 per B-share.  If it is based on a simple multiple of last reported book value, there is a possibility it could be as high as 218 currently - which would have allowed repurchases to continue.  Still unlikely that repurchases are material relative to Berkshire's size but every bit counts, and we are at least moving in the right direction.

I wonder if Warren still owns 1 million shares of JPM personally.  I would assume yes.

Dynamic

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #227 on: November 15, 2018, 05:51:45 AM »
Given the relative trading volume of Berkshire versus a lot of the recent purchases within their portfolio, I'd imagine the portfolio purchases will put the cash pile to work considerably faster than repurchasing Berkshire stock, but over many years I think the effect of repurchases could be a modest but useful contributor to per share value growth with maybe the occasional negotiated repurchase from an estate.

Clearly we now know that Berkshire was quite busy with the portfolio during Q3, quite possibly the early part of the quarter when prices were lower. Perhaps mid to late October was another time they were busy after the markets fell back about 10%.

I guess the JPM stake (~ 1% of market cap) will have to increase 5x before a 13D or SC 13G filing would reveal any personal stakes (as the DVA filings do for R Ted Weschler).

sleepydragon

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #228 on: November 15, 2018, 07:10:23 AM »
I think the fall in the market from around Oct 10th to 26th was probably sufficient for them to really build their stakes quite aggressively at even better prices than those during Q3. Not sure whether it would be up to 10% of JPM, but I'd imagine they could have put a lot of capital to work in that period on stock purchases and Berkshire buybacks too.

Could be I guess.  We already know how many shares they repurchased up to October 25th.  Meaningful repurchase activity beyond that depends on if the "ceiling" price on the repurchase plan is adjusted with the increase in last reported book value, or if it stays the same at roughly $208 per B-share.  If it is based on a simple multiple of last reported book value, there is a possibility it could be as high as 218 currently - which would have allowed repurchases to continue.  Still unlikely that repurchases are material relative to Berkshire's size but every bit counts, and we are at least moving in the right direction.

I wonder if Warren still owns 1 million shares of JPM personally.  I would assume yes.

I think there is no compliance/legal problems if his personal trades are the same directions as the BRK trades. So if Buffett is buying JPM he will not be selling in his personal accounts.

AdjustedEarnings

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Re: Buffett buybacks: Could Berkshire tender stock?
« Reply #229 on: December 06, 2018, 08:31:25 AM »
Last night, as I was drifting off to sleep, a question occurred to me... does WEB count the market value of the securities portfolio or intrinsic value when calculating the IV of BRK? Theoretically, intrinsic value would make more sense because those securities are (presumably) owned because they're at a discount to IV. In practice, if this difference was large enough, they'd simply buy more of those stocks. On the other hand, they own others like KO, where I'm pretty sure WEB wouldn't buy more stock today. Also in practice, float is often an issue (10%+) as are taxes.  It's not a huge deal, just something fun to think about. So I figured I'd ask the group's thoughts. Thanks!

I think this is now more important and concrete. I think the way I asked the question last time must not have been clear because the responses, while good, did not address the issue directly (except for one response). I'm resurrecting this issue because I think it's probably of more interest to people now. The reason I had debated this issue earlier was the expectation that a particular situation might occur. This situation has presented itself: Apple is down from 225 at 9/30 to 171 today. On their 252 million shares, BRK now has a "loss" from last reporting date of $14 billion, less taxes in their BV. This is Apple alone. Then you've got BAC, WFC, etc. which are all down varying amounts from 9/30. Having set the stage, now the question is:

If WEB thinks buying back at 207 was a good idea in the quarter ended 9/30, is the buyback threshold  now:

1. Lower, because (a) securities per share amount is lower (the two-column people), (b) alternative uses of cash are more available or, at least, visible on the horizon
2. The same, because intrinsic value (and look through earnings) of those securities probably has not changed
3. Higher, because, (a) intrinsic value of BRK increases a little each quarter, (b) for companies in which they can't go over 10% they can still increase the per-BRK-share ownership of those companies in the hands of continuing shareholders by buying back stock from other shareholders, (c) rates are lower which serves to increase financial asset values including BRK intrinsic value?

There could be other reasons for choosing either of 1, 2, or 3. Please feel free to suggest them.

PS: If the fall in the market continues, it's possible that BRK BV growth is negative for the quarter. If that happens, it'll help display in the coming Qs how much, if any, of WEB's IV calculation is based on BVs. On the one hand he says BVs are now not appropriate (and I tend to agree with this). On the other hand, he's not one to change his mind/methods too quickly.
« Last Edit: December 06, 2018, 08:38:25 AM by AdjustedEarnings »