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His stock is cheap, so Warren Buffett will buy it

September 26, 2011 |  3:11 pm


There are many differences between Warren Buffett’s company and most others -– starting, of course, with its outsized success.

But here’s another: Berkshire Hathaway Inc. announced Monday that it will buy back stock simply because Buffett thinks it’s cheap.

Berkshire said it will acquire an undisclosed amount of stock, provided that the purchase price is within 10% of book value and that the company's cash holdings exceed $20 billion. The buyback will apply to Berkshire's A and B shares, and will “continue indefinitely,” the company said in a statement.

Berkshire currently has about $43 billion in cash. Its book value is now about $98,700 a share, according to Bloomberg.

Berkshire’s Class A shares surged $8,129, or 8.1%, to $108,449 on Monday. The stock had closed at a 52-week low of exactly $100,000 on Thursday. Class B shares rose $5.72, or 8.6%, to $72.09. Both share classes are down 10% for the year, compared with a 7.5% decline for the Standard & Poor’s 500 index.

Stock buybacks among big companies have increased the last two years, and topped $100 billion in the second quarter for the first time since early 2008, according to Standard & Poor's. The $109.2 billion total was up 22% from the first quarter and 41% from a year ago.

But those numbers are a tad misleading.

Rather than gobbling up shares because they have fallen to irresistible lows, many companies are doing so primarily to offset the effect of employee stock options, according to S&P.

When companies issue options, they need to buy back an equal number of shares to prevent their total number of shares from rising. An increase in total shares would dilute earnings per share, which no company wants to do.

But few company managements are buying shares because they think they’re a bargain.

“Few companies are venturing outside of the box to purchase additional shares, as was the common practice from late 2005 through mid-2007,” said Howard Silverblatt, senior index analyst at S&P.

There would be nothing better for investors than for Buffett to start a trend.


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-- Walter Hamilton

Photo: Warren Buffett. Credit: Lucas Jackson/ Reuters