Such is the cult of attention around Berkshire Hathaway (NYSE:BRK.A) and its CEO Warren Buffett that he probably cannot have dinner without a dozen financial columnists debating the merits of him choosing beef, pork or chicken. With Monday's announcement that the company has authorized a share buyback that could be worth close to $30 billion or more, there is rampant second-guessing about the decision and numerous attempts to divine some further meaning in the move.
The Buyback to Be
Buffett has commented in the past that a buyback would only make sense if the shares of Berkshire Hathaway were significantly undervalued and there were no better apparent uses of the company's cash. Apparently both conditions are true in the market today.
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4 comments:
To me, dividends are a better use of spare cash than buybacks. Most buybacks are done at poor prices - remember GE did a big buyback in 2008 in the $30 range just months before its share price collapsed and it had to sell preferred shares to Buffett to obtain needed cash. Buy high and sell low is bad investing. Buybacks are often dictated more by a company's need to "show the flag" than any real belief of market undervaluation.
If Buffett doesn't want to institute regular dividends, he can always declare a special dividend to return cash to the owners. But if he'd rather do a buyback, fine, I won't criticize him, after all, it's mostly HIS company. I don't have to own his stock, and I don't. I do like dividends because, thanks to the current tax treatment that puts them on the same level as LT cap gains, it is a way of seeing a return on investment without having to sell shares. A dividend rewards the shareholder that holds on, the buyback rewards one that leaves. But, what the heck, we should all be Free to Choose.
@ PI -
I think you've been reading my stuff for a long time, and that means you probably know I agree with you completely here.
I'm a big fan of dividends; buybacks are tools of promotion and psychological manipulation. Dividends are cash money.
Sure, but in spots it sounded like you were considering "jumping ship"; apparently not.
In further thinking about the question, "Why buyback, why now?" it occurs to me there could be another reason for it. As you say, Buffett apparently can't find a better use for BRK cash in an overvalued market. But, holding cash for long periods hasn't necessarily been a problem for him previously. He's stated that he held quite a bit from 2003-2008 when he considered the market overvalued and put it to work when prices began dropping. So why does it seem to be burning holes in his pocket now? Possibly he suspects or knows that between the EU crisis and the US's fiscal problems, there's gonna be a whole lot of money printing going on. If real yields are low now, they may be about to get a whole lot lower and stay that way for a protracted period. I'm not suggesting hyperinflation, but Japan has lived with negative real yields for the better part of two decades. The fact that Buffett now has decided to engage in an activity he previously shunned suggests to me he may see something like that in the future.
Yeah, I see your point. I think I was trying to play devil's advocate and I wasn't really clear about what I actually thought about it.
I think for most cases and most companies, dividends are vastly preferable. In this particular case, I can understand why Buffett did what he did.
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