Oxstones Investment Club™SAN FRANCISCO (MarketWatch) — Warren Buffett’s plan to buy back Berkshire Hathaway Inc. shares isn’t only the safest route for deploying the conglomerate’s cash pile, it also helps pave the way for the Oracle of Omaha’s eventual exit, according to fund managers.
“This is a piece of the unfolding introduction of life after Buffett,” said Thomas Russo, partner at Lancaster, Pa.-based Gardner Russo & Gardner. “Under him, cash has had such a high value and going forward those maestro opportunities will be reduced.”
Earlier in the month, Berkshire Hathaway (XNYS:BRK-B – News) (XNYS:BRK-A – News) tapped Ted Weschler to help manage the firm’s equity portfolio. That pick followed the hire of Todd Combs last year to manage the portfolio.
Buffett turned 81 about a month ago.
This time around, Russo said, Buffett will go ahead with a significant buyback of shares unlike 2000, when the mere mention of a possible share repurchase boosted Berkshire shares to a level above book value. The buyback would mark the first time the firm has bought back shares.
Berkshire B-shares rose 6.9% to $70.93 in recent activity; A-shares advanced 6.2% to $106,540. Last Thursday, the price of A-shares dipped below $100,000 for the first time since January 2010.
Berkshire shares hit a multiyear high in early March, but they’ve been under pressure since as the economic outlook has soured. Read more.
Early Monday, Berkshire said it would buy back Class-A and Class-B shares at up to a 10% premium above book value using cash on hand. The conglomerate has about $47 billion, and said buybacks “will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion.”
The plan also essentially provides for “an unlimited and perpetual program,” according to a note from Birinyi Associates. The only other similar buyback program is one launched by Exxon Mobil Corp. (XNYS:XOM – News) in 2000, according to Birinyi.
Timothy Vick, senior portfolio manager at Sanibel Captiva Trust Co., said the buyback is a clear signal that Buffett thinks the market’s undervaluing Berkshire shares.
“To him, this makes good sense,” Vick said. “If he puts $10 billion or more into the buyback, it won’t be the highest return but it’ll be the best return for this level of safety.”
Vick said he doesn’t think repurchases will have a large effect on M&A activity at Berkshire. It may cut back on a potential list of targets Buffett may be looking to buy in the short term, but those cash reserves should get replenished in a matter of six to nine months, Vick said.
Russo noted that this type of opportunistic share buyback works out to be very much a tax-efficient way of returning value to shareholders.
“Nothing changes with M&A because of this,” Russo said. “It’s a statement of philosophy of intention and not an urgent action.”
Recent Berkshire investments include a $5 billion purchase of Bank of America Corp. (XNYS:BAC – News) preferred shares, a $9 billion deal to acquire Lubrizol Corp. and the $26 billion acquisition of Burlington Northern Santa Fe Railroad, which closed in February 2010.
The announcement threw focus on financial stocks, which are collectively down about 25% for the year.
“We can tell by movement this morning that investors are taking a look at financial companies. Many are trading at book value or below,” Vick said. “This Berkshire event is going to wake up investors to look for value there and CEOs to start looking at buybacks.”
Financial stocks were the best performers among the S&P 500 Index’s (SNP:^GSPC – News) 10 sectors on Monday, rising about 1.2% in recent activity. Read more on the finanical sector.
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