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2016: How firm is the 1.2x book value limit for buybacks?
GREGG WARREN: While Berkshire has authorized a share repurchase program, originally aimed at buying back shares at prices no higher than 10 percent premium to the firm’s most recent book value per share, a figure that was subsequently increased to repurchase shares at prices no higher than 20 percent premium to book value, there’s been relatively little share repurchase activity during the last four-and-a-half years.
Even as the shares dipped down below the 1.2 times book value threshold during both January and February of this year, if you base it on a buyback price calculated on Berkshire’s book value per share at the end of 2015, a number that had not yet been published when the stock did dip that low.
Given your belief that Berkshire’s intrinsic value continues to exceed its book value, with the difference continuing to widen over time, are we at a point where it makes sense to consider buying back stock at a higher break point than Berkshire currently has in place, and would you ever consider stepping in and buying back shares if they dip down blow 1.2 times book value per share even if that prior year’s figure had not yet been released?
WARREN BUFFETT: Yeah. Gregg, you mentioned that it sold below 1.2, and I don’t think that’s correct. I keep a pretty close eye on that, and it’s come fairly close to 1.2. But I could almost guarantee you that it has not hit 1.2, or we would’ve done it. And I’d be happy to send you figures on any day that you might feel that it did hit the 1.2.
Clearly in my view, Charlie’s view, the board’s, the stock is worth significantly more than 1.2, but it should be worth significantly more, or we wouldn’t have it at that level.
On the other hand, we did move it up from 1.1 to 1.2 because we had acquired more businesses over time that were — where the differential between our carrying value and the book value — and the intrinsic value really had widened from when we set the 1.1.
I have mixed emotions on the whole thing, in that from strictly a financial standpoint, and from the standpoint of the continuing shareholders, I love the idea of buying it at 1.2, which means I probably would love the idea of buying it a little higher than 1.2.
On the other hand, I don’t take — and it’s the surest way of making money per share there is. I mean, if you can buy dollar bills for anything less than a dollar, you know, there’s no more certain way of making money.
On the other hand, I don’t particularly like — enjoy the actual act of buying out people who are my partners at a price that is below — well below what I think the stock is worth.
So — but we will buy stock, almost certainly. We don’t make it a 100 percent pledge because there’d be a lot of ramifications to that, but the odds are extremely high that we would buy a lot of stock at 1.2 times or less. But we would do it in a manner where we were not propping the stock at any given level. And if it happens, it will be very good for the stockholders who continue.
It is kind of an interesting situation, though, because if it’s true that we will, and are eager even, from a financial standpoint, to buy it at that price, it’s really like having a savings account where if you take your money out as a dividend, or as an interest payment on a savings account, you know, you get a dollar.
But if you leave it in, you’re almost guaranteed that we’ll pay you $1.20. I mean, why would anybody want to take money out of a savings account if they could cash it in, what they left, at 120 percent?
So it’s a — it acts as a backstop for ensuring that a no-dividend policy results in greater returns than it would be if we paid out a dollar and people got a dollar. If they leave a dollar in, they’re going to get at least $1.20 in my view, at least — it’s not a total guarantee, but it’s a pretty strong probability.
So would we increase that number? Perhaps. If we run out of ideas, and I don’t mean, you know, day by day, but if it really becomes apparent that we can’t use capital effectively within the company, in the quantities with which it’s being generated, then at some point the threshold might be moved up a little because it could still be attractive to buy it.
And you don’t — you know, you don’t want — you don’t want to keep accumulating so much money that it burns a hole in your pocket. And it’s been said, actually, that — you know, that a full wallet is a little like a full bladder, that you may get an urge fairly quickly to pee it away, and we don’t want that to happen.
But so far that hasn’t happened, and we will — if it ever gets to where we have 100 billion or 120 billion or something like that around, we might have to increase the price.
Anytime you can buy stock in for less than it’s worth, it’s advantageous to the continuing shareholders, and — but it should be by a demonstrable margin. You can’t — intrinsic value can’t be that finely calculated that you can figure it out to four decimal places or anything of the sort. Charlie?
CHARLIE MUNGER: Well, you’ll notice that elsewhere in corporate America, these buyback plans get a life of their own, and it’s gotten quite common to buy back stock at very high prices that really don’t do the shareholders any good at all. I don’t know why people exactly are doing it. I think it gets to be fashionable.
WARREN BUFFETT: It’s fashionable and they get sold on it by advisors.
CHARLIE MUNGER: That’s true, too.
WARREN BUFFETT: Yeah. Can you imagine somebody going out and saying, we’re going to buy a business and we don’t care what the price is? You know, we’re going to spend $5 billion this year buying a business, we don’t care what the price is.
But that’s what companies do when they don’t attach some kind of a metric to what they’re doing on their buybacks. To say we’re going to buy back 5 billion of stock, maybe they don’t want to publicize the metric, but certainly they should say, we’re going to buy back 5 billion of stock if it’s advantageous to buy it back.
But they don’t — you know, if they say we’re going buy the XYZ Company, they say, we’ll buy it at this price, but we won’t buy it at 120 percent of that price. But I have very rarely seen — Jamie Dimon is very explicit about saying he’s going to buy back the stock when he’s buying it below what he considers intrinsic value to be.
But I have seen hundreds of buyback notices, and I’ve sat on boards of directors one after another where they have voted buybacks and basically — and they said they were doing it to prevent dilution or something like that. It’s got nothing to do with preventing dilution. I mean, if you’re — dilution by itself is a negative and buying back your stock at too high a price is another negative.
So it has to be related to valuation. And as I say, you will not find a lot of press releases about buybacks that say a word about valuation.
CHARLIE MUNGER: The occasion — we’re always behaving a lot like what some might call the Episcopal prayer. We prayerfully thank the Lord that we’re not like these other religions who are inferior. (Laughs)
I’m afraid there’s probably too much of that in Berkshire, but we can’t help it. (Laughter.)