According to the news report by Bloomberg, Berkshire Hathaway Inc.’s cash pile has grown to $111 billion after its second quarter performance report was released. This has now allowed Warren Buffet more leeway to make stock buybacks for the company with investors now wondering how soon it would be before they could garner the benefits from this move.
The second quarter results, which were released on Saturday, did not reveal how many shares the company was going to buy back, or even at what price. However, investors do know that it will happen sometime soon. Last month, Berkshire had announced that it was not going to initiate share buy backs till its second quarter’s results were announced.
The challenge some analysts foresee is that the fact that the company’s performance was so good could make shares too expensive. After the Q2 results were announced last week, Berkshire’s Class A shares gained another 3% to trade at $313,700 per share. The company’s shares are currently trading at $316.505 at the time of writing.
The condition that Berkshire put in place when it announced the possibility of a share buyback last month was that both Warren Buffet, the CEO and Chairman of the company, and Charles Munger, the Vice Chairman of Berkshire, need to find the cost of the shares less than the conservatively determined intrinsic value of the company.
According to Edward Jones analyst, Jim Shanahan, investors currently believe that Berkshire is willing to and also has the ability to buy back its stock. However, if the stock moves any higher, then that window of opportunity of buying back shares may close.
Warren Buffet has traditionally liked to invest in companies, especially railroads and insurers to expand his empire. However, since last year, prices for businesses that could have interested him reached all-time highs, thereby creating a barrier for Berkshire to go ahead with those deals.
The challenge now is that the company’s cash pile is growing uncomfortably large, despite Berkshire investing $6.1 billion in Apple Inc. last quarter. The company also redeemed $4.77 billion worth of the tech major’s shares at the same time. However, filing also show that Berkshire’s holdings in Apple were at $47.2 billion by the end of June, which is a jump from its March 31 figure of $40.7 billion.
This is not the first time that Berkshire would be doing a share buyback. The company had bought back some of its shares from a long time shareholder back in 2012. Under the conditions of that buyback program, Berkshire was not allowed to pay more than 20% over the book value of the company.
According to the new share buyback program, that cap has been removed. According to the latest data, the company’s book value, which is a measure of assets after liabilities are deducted, was at $217,677 for every Class A share at the end of Q2. These Class A shares were trading at 40% more than the company’s book value on Friday when markets closed.
Investors like Check Capital Management’s Steven Check stated that buybacks could be initiated any time now, however, it is not easy to assess how many shares the company buys back before prices rise once again.
Not everyone believes that Berkshire should go for the stock buyback option. Gardner Russo & Gardner’s Thomas Russo, who manages about $14 billion of Berkshire’s stocks, feels that the company should not buy back its stocks. Rather, he says, the company should wait for potential acquisitions.
CFRA’s analyst Cathy Seifert believes that removing caps on buybacks doesn’t mean that the company will stop looking for deals.