Warren Buffett has gone from shunning stock buybacks to being one of the world’s biggest repurchasers.
The famed investor’s Berkshire Hathaway spent the third quarter buying back about $US9 billion ($12.4 billion) of its own stock, more than it had repurchased in any full year in its history. Buffett abandoned his long-held aversion to that use of capital a couple years ago as he struggled to find big deals and has ramped up the practice in 2020.
While many companies have stopped or slashed share repurchases to preserve capital during the pandemic, Buffett sees his own firm’s shares as a good investment at a time when he’s expressed concern about several other industries. Last quarter’s buying spree takes this year’s total buybacks to $US16 billion, and the most recent pace would be the biggest of any US company except Apple Inc., which happens to be Buffett’s largest investment.
“The forceful share buybacks suggest that at least one lever that can be pulled more forcefully as the price lingers is the one that he’s doing,” Thomas Russo, who oversees more than $US9 billion including Berkshire shares at Gardner Russo & Gardner, said in a phone interview. “I’m delighted to see that kind of commitment.”
The buybacks allowed Buffett to chip away at Berkshire’s cash pile in the third quarter, with that war chest dropping slightly to $US145.7 billion. The funds, which still give him plenty of capital to deploy into acquisitions, stock purchases or buybacks, have recently been accumulating faster than Buffett can put them to work in higher-returning assets.
The heightened buybacks could indicate more optimism in the conglomerate’s prospects, just months after Buffett told Berkshire shareholders at the annual meeting in May that repurchasing shares wasn’t more compelling than when the stock was much higher before the pandemic.
Berkshire stock climbed 20 per cent in the third quarter, surpassing the 8.5 per cent gain in the S&P 500 Index during the same period. The company accelerated its repurchases even as the shares climbed through the quarter. Still, Berkshire stock is overall cheaper than it was at the end of last year, with Class A shares down 7.6 per cent through Friday’s close.
The conglomerate’s businesses have bounced back slightly from the depths of the slump in the second quarter. Profit at the railroad, while still down from a year earlier, was higher than the three months ended June 30, and Berkshire’s utilities posted its highest quarterly profit in more than a decade. Still, operating profit dropped 32 per cent, hurt by the insurance unit’s first underwriting loss since the end of 2019.
Buffett’s businessses have been battered by the pandemic this year. Aerospace parts-maker Precision Castparts, which was hit by a $US10 billion charge in the second quarter, reported an 80 per cent drop in pretax earnings in the three months that ended Sept. 30. Retailers such as See’s Candies and Oriental Trading have experienced “significant declines” in earnings this year.
Berkshire’s board announced a policy change in July 2018 that allowed Buffett and his business partner, Charles Munger, to buy back stock when the price is below whatever they consider Berkshire’s intrinsic value. Previously, they couldn’t make repurchases if the price was more than 20 per cent above current book value.
Buffett’s appetite for equities wasn’t limited to his own shares. After selling the most stocks on a net basis in more than a decade during the second quarter, Berkshire reversed course in the following months, purchasing $US4.79 billion of stocks on a net basis during the third quarter.
The company’s investments delivered almost $US25 billion in investment gains amid the market rally, helping net income almost double despite the drop in operating profit.
Source: Thanks smh.com