Warren Buffett has looked around for suitable ways to invest Berkshire Hathaway’s $106 billion cash hoard, and he has finally come up with an idea: Berkshire Hathaway.
The move sent Berkshire shares soaring more than 5 percent on Wednesday.
Starting in August, the Omaha conglomerate may buy back more shares, joining a huge number of other American companies that have embraced share purchases as a way to use cash piles swollen by tax cuts and strong earnings.
Berkshire’s board approved a change in how Buffett and his long-time lieutenant, Charlie Munger, decide whether to use the cash for share purchases. Late Tuesday, Berkshire said the decision would rest on whether Buffett and Munger both agree the trading price is below Berkshire’s intrinsic value.
That sounds innocuous enough but it’s a big shift from the yardstick Berkshire has used in the last couple of years. The old policy prevented Berkshire from buying its stock if it was trading higher than 120 percent of book value. Berkshire’s book value, based on its B shares, is estimated at $149 a share, while its intrinsic value is more like $236, according to calculations by J. P. Morgan Chase analysts.
The shares currently are trading at around $199.
Based on book value, Berkshire wouldn’t be able to buy back shares at this level under the old policy. But it would be able to buy them back based on intrinsic value under the new policy. Berkshire said it is sticking with the old policy that it won’t spend down the cash pile below $20 billion, meaning it has about $86 billion or so to use.
“The new policy provides Berkshire with more flexibility to deploy excess cash of about $86 billion that is a large drag on returns, particularly given Berkshire has not been able to find attractively valued acquisitions in an expensive market,” wrote Sarah DeWitt, an analyst at J. P. Morgan, in a note on Tuesday.
source : CNBC