Wednesday, January 26

Buffett’s Berkshire Appetite Outweighs Cash Spent On Apple Stock

Warren Buffett has spent more money buying back Berkshire Hathaway shares in recent years than he did on amassing his biggest equity stake in Apple.

Berkshire spent nearly $ 20 billion more buying back its own shares since mid-2018 than it spent accumulating its stake in Apple through the end of last year. In all, Buffett invested about $ 51 billion in buybacks since a change in his policy more than three years ago, and he appears to have continued to buy at least $ 1.7 billion in shares since the end of September.

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Buffett, Berkshire chairman and chief executive officer, has turned Berkshire into a sprawling conglomerate valued at more than $ 650 billion, but that immense size has put pressure on his need for what he saw as an elephant-sized acquisition to power the growth of Berkshire. Buffett has been frustrated in his recent search for deals, sometimes outmatched by aggressive private equity firms. That has left him increasingly reliant on buybacks, with more than $ 20 billion in buybacks so far this year, as a way to put some of Berkshire’s cash record to work.

“The bullish case would say they bought back their $ 20 billion stock because they are confident in their future prospects and that should be a catalyst for stocks, and I have a feeling it probably will,” Cathy Seifert, analyst at CFRA Research , said. “The bearish case, which is also relevant to point out, is that this is a company that has had, as declared desire, the need to make additional acquisitions and they have not been able to do so.”

It’s a marked change for a CEO who previously avoided buybacks. For years, Buffett preferred big deals and spending money buying shares in other companies rather than buying back Berkshire’s own shares. But that changed in 2018 when the company’s board of directors lifted a cap on buybacks, giving Buffett and his longtime business partner Charlie Munger more flexibility to spread the profits.

The buybacks have now surpassed even Berkshire’s largest stake, an Apple stake valued at more than $ 121 billion at the end of September. The company has spent just $ 31 billion buying Apple stock since it started piling up that stake in 2016 through the end of 2020, according to the most recent data available.

What Bloomberg Intelligence says

“We believe Warren Buffett’s major share buybacks show his conservatism, as rising valuations make deals that he may find attractive more rare.”

– Matthew Palazola and Kylie Towbin, BI analysts

All of the repurchase activity, while significant in size, has not been enough to significantly reduce some of the conglomerate’s cash. Berkshire ended September with a record $ 149.2 billion in funding in its coffers. While investors often want management to remain disciplined about when and how it spends money, the growing amount of cash is “somewhat disappointing,” according to Edward Jones analyst Jim Shanahan.

“The buybacks were good, but the cash balances increased again,” Shanahan said. “Cash is now approaching $ 150 billion. That was certainly unexpected at the beginning of this calendar year, I would have thought they could have managed that decline with a combination of investments, acquisitions and buybacks. ”

The Omaha, Nebraska-based business, which reported third-quarter earnings on Saturday, posted an 18% increase in operating profit during that period, driven by record rail earnings and strong results from its energy businesses. That helped offset even more underwriting losses at his group of insurers, which have been hit by catastrophes like Hurricane Ida and more frequent claims from their drivers at auto insurer Geico.

Berkshire also disclosed that it repurchased at least $ 1.7 billion in stock from late September through October 27, according to Saturday’s filing. Whitney Tilson of Empire Financial Research, who has attended Berkshire’s annual meeting for more than two decades, applauded the buyback, but noted that he would still rather see Buffett find the next lucrative bet in stocks.

“If Buffett could find another Apple, he would clearly prefer to be assigned to that,” Tilson said. “Buying Berkshire stock back makes sense when you’re drowning in cash.”

© 2021 Bloomberg

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