In late September the FT Companies and Markets section led with news that Berkshire Hathaway the US conglomerate run by Warren Buffet had announced plans to buy back its own shares. The company would be using part of their cash reserves to repurchase shares as long as they had to pay no more than a 10% premium to the company's book value and in addition ensuring their cash holdings remained at a minimum of $2obn. The impact on the share price was immediate with the A shares rising in value to $108,449. The interest in this story was especially strong because in the past Warren Buffet has been quite dismissive of share buybacks describing them as financial gimmickry. At the time financial markets welcomed this announcement as it was seen as a boost to investor confidence at a time when most news remains very gloomy.
Oct 6, 2011
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3 comments:
That is interesting how Warren Buffet really believes in his company, and believes they are the best investment out there. I think this really says a strong statement to the rest of the market, "I'm the best investment you can get".
I wonder if there is actually anything else behind the scenes going on, like he is planning for something grand. Or is there nothing to it and he believes that in the current market situation his shares are the best.
I would like to explain first what advantages and disadvantages there are in general for Stock buy-backs. An advantage is that there is going to be a positive impact on the Earning per Share (EPS), what is good, because it is a measurement to value a company. As the Earning per Share rises, investors become more comfortable with buying this share, because there are numbers, which proof its reliability. Another positive aspect is that if a company decides to buy shares, it shows that the company has no liquidity problems, what also proofs the company´s well-being.
It also should be considered that if a company invests in itself especially in times of weakness, it signals its confidence about undervalue of its shares.
Even if all things mentioned above are reasons to buy shares, there could be also hidden negative intentions behind a buy-back.
If a company is “unhealthy” the buy-back of shares, would cause a greater EPS and would encourage investments, because people tend to believe in the “positive news”, even if there are none. That would cause a rise in share prices and if it turns out to be false news, you can imagine what happens. Investors will suffer loss.
As Buffet is a conservative investor, has long life experience in investing and is also known to make very well-thought decisions, there shouldn´t be second thoughts about his action. He definitely wants to express his confidence in the shares and want them to grow in value again.
This is an indication to shareholders and the whole market through a man who was always dismissive of share buy backs feels that the company is in a strong position and share buy backs would be in the companies best interests. This shows that the company is not struggling with liquidity at a time the market is struggling as a whole.
On the other hand it makes me feel as if warren Buffet feels as though the company is undervalued and him saying they would not pay a bigger premium than 10% shows that he has an idea of the value of the company and that it is at least 10% higher than the share price.
The fact that a man like Mr Buffet has come out with this should give shareholders and other stakeholders confidence as he has been known for good and well planned decision making in the past!
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