Warren Buffett's conglomerate Berkshire Hathaway will launch a share buyback program, an unprecedented move from Buffett that comes after months of investor complaints that the stock is undervalued.
Buffett long balked at a buyback, saying he preferred using spare cash to buy companies that would increase his own company's profit margins.
Yet some long-time investors have said Berkshire shares were lately at their cheapest in a generation, and even analysts who were cautious on the stock said it was attractively priced.
In his letter to shareholders last February, Buffett bragged that not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years. But Berkshire said on Monday it is willing to pay up to 10 percent more than book value for its stock.
In the opinion of our board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise, Berkshire said in a statement. The buyback program will run indefinitely, the company said.
One long-time Buffett investor said the Oracle of Omaha was effectively buying two things cheaply -- Berkshire as an operating company for a broad set of industrial and consumer businesses, and Berkshire as a portfolio of financial and other stocks that have been heavily sold of late.
There's just so much leverage right now, this is close to as good a setup as you might ever see, to be a domestic play in a land of people hating domestic, with double leverage, said Bill Smead, chief investment officer of Smead Capital Management in Seattle.
Berkshire Class A shares rose 8.1 percent to close at $108,449 -- almost equal to the upper threshold of what Berkshire said it would pay for the shares, including the premium and based on last quarter's book value. The more actively traded Class B shares rose 8.6 percent to $72.09. Last week both classes fell to their lowest point since early 2010.
The A shares are so expensive because Berkshire has never split them, choosing instead to let them appreciate over time. The B shares, which hold lesser voting rights, were split to help finance the takeover of railroad Burlington Northern.
CASH ON HAND
The company said it would use cash on hand to fund the buybacks, but would not buy any shares if doing so took the company's cash position below $20 billion.
Berkshire had $47.89 billion in cash as of June 30, but has spent at least $15 billion this quarter on acquisitions and investments, most notably the chemical company Lubrizol and a preferred stake in Bank of America.
As of June 30, Berkshire's book value was $98,716 per Class A share, which would suggest the company would be willing to pay up to $108,588 per share in the buyback program.
If Berkshire spent $10 billion buying stock at a 10 percent premium, it could end up repurchasing nearly 10 percent of its Class A shares.
One investor said the timing of Berkshire's announcement might be related to recent sharp market declines.
One might argue that (Buffett) is making a statement about the overall market. Perhaps he thinks that the selling is excessive, said Michael Yoshikami, chief executive of investment manager YCMNET Advisors and a Berkshire holder.
A possible confirmation that Berkshire thinks the market is cheap is the recent take-it-or-leave-it offer for reinsurance company Transatlantic Holdings.
Though it was rebuffed, another Berkshire investor said it was fair to assume that Buffett remained in the market to buy companies at the right price, even with the potentially huge buyback coming.
I don't think he's out of the acquisition market, ever, said James Armstrong, president of investment adviser Henry H. Armstrong Associates in Pittsburgh. Even if his cash runs down to the $20 billion cutoff, if another Lubrizol appears on the scene, he can fund that purchase by selling stock or other securities, or by borrowing.
MORE SIGNS OF CHANGE
Other investors said the buyback was a sign that Berkshire's relationship with investors was changing, which could portend even bigger changes down the road, like another idea often rejected by the 81-year-old Buffett -- a dividend.
Can he continue to experience a higher return on equity? If not, is a dividend in the future somewhere for the major shares? It might be that this company is turning into a slower-growth stock that generates high cash flow, said John Augustine, chief investment strategist for Fifth Third Bank, which manages $25.6 billion and owns Berkshire shares.
The buyback is just the latest sea change at Berkshire, which is slowly transforming itself as Buffett ages and begins to look toward the future of the conglomerate.
That future has been at the forefront of investor thinking since early this year, when Buffett's presumed heir apparent, David Sokol, left the company amid a scandal around his own personal investments in Lubrizol.
Berkshire has brought on two investment managers who will help run its portfolio after Buffett retires, and the board is believed to have a short-list of candidates who would succeed him as chief executive.
Charlie Munger and Warren Buffett do really good analysis when they make investments in other companies, and you can be sure they know what they're doing here, said Michael Holland, founder of Holland & Co, who oversees more than $4 billion of assets and owns Berkshire shares.
(Reporting by Ben Berkowitz in New York. Additional reporting by Dan Wilchins and Jonathan Stempel in New York. Editing by Dave Zimmerman, John Wallace and Robert MacMillan)