Wealth Finance

Speculation has arisen over why Warren Buffet chose to enact a stock buyback of Berkshire Hathaway (NYSE: BRK.A) shares for the first time in living memory.

Certainly the stock makes for a good buy — shares have dropped almost 24 percent since late February. Moreover, given the huge amount of cash the conglomerate holds, repurchasing shares might be one of the best methods of redeploying all that bounty.

“The underlying businesses of Berkshire are worth considerably more than this amount [that shares are trading at],” the company said in a statement on Monday. “If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares.”

Timothy Vick, a senior portfolio manager at Sanibel Captiva Trust Co. in Sanibel, Fla., told MarketWatch: “This is a clear signal that Buffett believes there’s significant value not being recognized by the market, If he puts $10 billion or more into the buyback, it won’t be the highest return, but it’ll be the best return for this level of safety.”

Others have pondered that perhaps Buffett – who is now 81 years old – is simply preparing for his exit and planning to bequeath his legendary company’s management to younger warriors.

Indeed, Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pa., said to MarketWatch: “This is a piece of the unfolding introduction of life after Buffett. Under him, cash has had such a high value and going forward those maestro opportunities will be reduced.”

Over the past year, the Oracle of Omaha has hired hedge fund manager Todd Combs as Berkshire’s chief investment officer and another hedge fund specialist Ted Weschler as portfolio manager.

However, Berkshire cautioned that its largesse would not be indefinite. While the company indicated it will buy back Class-A and Class-B shares at prices of up to a 10 percent premium above book value, it will maintain a cash balance of at least $20-billion (Berkshire currently has about $48 billion cash on hand).

Moreover, a buyback may signal that Buffett sees little value elsewhere in the stock market.

Sean M. Snaith, an economist at University of Central Florida, commented to International Business Times: “Given all the cash that Berkshire is sitting on, perhaps this was the best opportunity out there right now. After the Bank of America investment perhaps they were looking for something a little less risky.”

Berkshire is a highly unique corporation, it comprises a batch of companies, which in recent years has gotten larger.

Over the past year and a half, Berkshire acquired $5 billion of Bank of America Corp. (NYSE:BAC) preferred shares; spent $9 billion for Lubrizol Corp. and $26 billion for Burlington Northern Santa Fe Railroad.

Howard Silverblatt, senior index strategist at Standard & Poor’s, told IB Times that historically Berkshire has not done buybacks, and their last dividend was in 1962, for $0.10.

“Their board’s authorization [Monday], permitting management to do buybacks, were in the typical Berkshire style, short with few details,” he said.

“However, it does state that ‘repurchases will enhance the pre-share intrinsic value’, leading me to believe that they would be doing Share Count Reduction (SCR), which few companies are doing now. Most are keeping up with shares issued for options and dividend reinvestment programs, and not reducing share count.”

SCR increases earnings-per-share (EPS), and higher EPS typically lead to higher prices.

Indeed, Berkshire’s Class B shares surged more than 8.6 percent on Monday on just the announcement off the buyback.

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