Warren Buffett's Stock Buybacks Are a Bust

Mark Hake

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Warren BuffettReuters

Berkshire Hathaway has been on a buyback binge, but it hasn’t helped the stock price.

Sorry, Warren Buffett. Your buyback binge hasn’t worked. So far this year, Berkshire Hathaway stock has performed about the same as the S&P 500.

What is going on here? Does the market think that his decision to focus on repurchasing Berkshire stock is a waste?

Let’s look at what is going on.

Berkshire’s Buybacks

Berkshire Hathaway’s Q3 $7.6 billion in stock repurchases were higher than in prior quarters. Moreover, the company is on track to buy back about 1% of its market value ($654 billion) on a quarterly basis.

So far this year (as of Nov. 9), BRK stock is up 25.34%. This can be seen in the chart below.

However, the market index is up about the same amount.

Berkshire Hathaway is up 25.3% vs. 26.6% for the market. In other words, despite the buybacks, Berkshire Hathaway is trailing the market. That is nothing to write home about.

It also implies that the company’s buybacks have had little effect. For example, year-to-date, Berkshire Hathaway has repurchased $20.1 billion, or 3.07% of today’s market cap.

If it follows through in Q4 with a similar amount of repurchases, that will bring the annual buybacks to about 4.0% of its market value in the last 12 months.

So far, it’s all a big yawn for investors.

It’s All in the Mind

There are really two schools of thought about this.

Cumulative Counts.

For example, on a cumulative basis, the buybacks will likely start to have an effect on the price of Berkshire Hathaway.

For one, it will tend to lower the price per value metric, like the price-to-book value that Berkshire Hathaway stock will trade.

For example, let’s say that the stock rises 50% over three years, and the company buys back about 4% of its market value over that period.

By definition, that will reduce the share count by 6% (i.e., 50% price gain x 4% buyback yield x 3 years = +6.0% reduction in share count). That reduces the price to book value (P/BV) metric by 6% over 3 years.

To be honest, that is not really that big a deal to most investors. But what if the stock doubles over that period? Then the share count reduction is 12% (i.e., 100% price gain x 12% buyback yield). That 12% P/BV discount over three years, might be of significance to some, but probably not too many investors.

Keep in mind as well that this assumes that Berkshire will be spending larger amounts of money on the buybacks. For example, if it kept spending 1% of the market value per quarter but the price is rising 33.3% annually, that is a greater amount of money than if the stock is only rising 16.67% annually.

It’s a waste.

I said there were two schools of thought on this. The other thinking is that it’s all in the results. If the stock can’t outperform as a result of the buybacks, the shareholders are really no better off.

For example, what if the company kept up this pace of buybacks over the next three years, but Berkshire Hathaway stock shows no obvious effect, in terms of outperformance vs. the indices?

Most people would call that a waste of money. And especially so, if, as I point out, the company continues to pony up 1% of its growing market cap per quarter.

What May Be Going On

The cold hard fact may be that the market is anticipating Warren Buffett leaving the scene sometime soon.

They know that with him gone (either stepping down or a reduced role), the stock is likely to fall.

The buybacks, therefore, do nothing, to change this sentiment, which is quite negative for the stock.

In this situation, the fact that Berkshire Hathaway stock is cheap and getting cheaper because of the buybacks may be irrelevant.

What Investors Should Do

Investors either love Buffett or see him as anachronistic in today’s metaverse, crypto, high price-to-value market cap stock market, and digital asset universe.

The buybacks are not going to change anyone’s view, especially as I point out, they tend to have only a marginal, yet cumulative, effect on the stock price.

As you might suspect, I believe that Buffett’s departure is being telegraphed, anticipated, and discounted by the market. Otherwise, the buybacks would have had a much higher effect on the stock price vs. the indices' performance.

The most logical thing seems to wait for a huge drop in the price once Buffett leaves and then try and take advantage of that price situation. In the meantime, put any dollar amount that would otherwise have been spent on Berkshire stock in a market index. Sell those dollars when Buffett leaves and buy the stock at a discount.

That may not be a popular view. But it’s a rational one, given how the market seems to be viewing the effect of Buffett’s buybacks.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock, as I am not undertaking to induce you to buy or sell securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

This represents my analysis of Berkshire Hathaway and it is not meant to provide you with specific advice in your own situation. I do not presently own Berkshire Hathaway or related securities, but I may buy some of these in the coming weeks.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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