Berkshire to Buy Back Shares

In yet another surprise move this year,  Berkshire Hathaway (BRK.A) (BRK.B) announced Monday that its board of directors has authorized a share-repurchase program that will be used to buy back Class A and B shares at prices no higher than a 10% premium to the firm's current book value per share (which stood at $98,716 per Class A share or $66 per Class B share at the end of the second quarter). While Berkshire was vague about how much cash it would spend buying back stock, the insurer did note that repurchases would not be made if they reduced the firm's consolidated cash balance below $20 billion.

The company closed out the second quarter with around $48 billion in cash on its books. Having invested $5 billion in  Bank of America (BAC) during August, and using another $9 billion this month to complete its purchase of Lubrizol, Berkshire is probably sitting on something closer to $35 billion right now (ignoring, of course, any of the cash flows generated by its businesses, as well as the $3 billion expected to come through this year from  General Electric (GE) as that company pays back the lifeline that CEO Warren Buffett lent it during the height of the financial crisis). This would leave at least $15 billion for Berkshire to use buying back stock in the near term.

Given the constraints that Buffett has placed on the price he would be willing to pay for Berkshire's shares, we don't expect the full amount to be deployed, as the Class A shares are already trading at more than 7% above book value. We will, however, continue to monitor the situation and make adjustments to our fair value estimate as they are warranted.

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