Warren Buffett has often applauded share repurchase programs instituted by companies in which Berkshire holds significant equity positions, but his attitude toward Berkshire Hathaway repurchasing its own shares has always been more complicated. In early 2000, at a time when Berkshire shares were severely depressed, Buffett expressed an interest in repurchases below $45,000 per Class A share but noted that he was not doing so merely in order to “support” the stock. At the time, he admitted that he had made errors prior to that point by not repurchasing shares.

Over a decade later, Buffett expressed mixed emotions regarding the repurchase program announced in September 2011 noting that he doesn’t enjoy cashing out selling partners at a discount even though doing so somewhat enriches continuing shareholders. A watershed change in Berkshire’s repurchase policy took place in 2018 when an explicit price-to-book limit was removed in favor of allowing discretionary repurchases whenever management considered shares to be undervalued. Readers who are interested in a comprehensive review of Berkshire’s repurchase activity since 2011 can refer to Buffett Loosens the Purse Strings for Repurchases, an article posted on this site in February 2020.

During the Berkshire Hathaway annual meeting held on May 2, 2020, which was covered in the Rational Reflections newsletter, Warren Buffett seemed very worried about the COVID-19 pandemic and general economic conditions. During the meeting, he disclosed that Berkshire halted all repurchase activity after March 10 despite the stock price plunging well below the level of Berkshire’s recent repurchase activity. The transcript of the meeting is worth reviewing in order to understand the level of Buffett’s caution in early May. He clearly stated that the range of possible economic outcomes resulting from shutting down large segments of the economy remained “extraordinarily wide”. The fact that Buffett was repurchasing shares as late as March 10 before halting activity reveals that a change in his thinking might have taken place at that point. Perhaps it was related to his discussions with Bill Gates and Dr. Anthony Fauci around that time.

In light of Buffett’s comments only ten weeks ago, it was surprising to learn that Berkshire Hathaway almost certainly repurchased a significant amount of stock at some point between the annual meeting and July 8 when Buffett submitted a regulatory filing to the Securities and Exchange Commission documenting his annual charitable donations of Berkshire Hathaway stock. Sharp-eyed investors and journalists picked up on the implications of the filing which disclosed Buffett’s holdings as a percentage of shares outstanding. Here are the facts that were included in the filing:

• Buffett owned 248,734 Class A shares and 10,188 Class B shares as of July 8.
• Each Class B share has 1/1500 of the economic rights of a Class A share.
• We can calculate that Buffett owned 248,740.8 Class A equivalents as of July 8.
• Buffett’s ownership of Berkshire was 15.54% of the economic interest of the company.
• Dividing 248,740.8 by 0.1554, we calculate that there were 1,600,649 Class A equivalents as of July 8.
• The 10-Q report reveals that there were 1,620,023 Class A equivalents outstanding as of March 31.
• This shows that 19,374 fewer Class A equivalents were outstanding on July 8 than on March 31.

The average closing price of the more liquid Class B shares between May 4 and July 7 was approximately $180, which is equivalent to $270,000 per Class A share. If we assume that repurchases were made at around that average price of $270,000, this would imply that Berkshire allocated approximately $5.2 billion to repurchases over that two month span. It is very doubtful that these repurchases started immediately after the annual meeting given Buffett’s clear indication that he was very concerned at that time and not eager to allocate capital. Given Buffett’s reputation for integrity, it’s inconceivable that he “talked down” the stock on Saturday, May 2 only to repurchase shares on Monday, May 4. But he might have changed his mind a couple of weeks later. We will not know the exact amount allocated to repurchases until Berkshire’s second quarter 10-Q report is filed in early August, but the repurchase amount is likely to be in the $5 – $5.5 billion ballpark.

Reading the tea leaves regarding repurchase activity at Berkshire is hazardous business. In Berkshire Hathaway and the Coronavirus Crash, published on March 22, I noted that Berkshire was trading at a price-to-book level significantly below the old 1.2x limit and that it was possible that Buffett could find shares attractive. The key question of how much of Berkshire’s large cash balance was truly deployable was the subject of another article, Thoughts on Berkshire’s Deployable Cash, published on April 21. Along with many Berkshire shareholders, I was surprised by Buffett’s cautious tone at the annual meeting and by the lack of repurchase activity even as shares fell far below valuation levels that had previously prompted repurchase activity. However, as Buffett said, his view of the range of possible outcomes of the COVID pandemic were very wide and clearly he wanted to reduce risk to the business by maintaining significant cash.

Based on commentary in the financial media and on Twitter, it seems like many Berkshire shareholders were disappointed with the lack of repurchase activity and the stock declined immediately after the annual meeting. Although the stock price has recovered since then, Berkshire has badly lagged the S&P 500 this year and remains far below its record high level of $344,970 reached on January 17, 2020. Although the explicit price-to-book limit of 1.2x was eliminated in mid-2018, many shareholders still erroneously viewed that level as a “floor”, a mentality that I criticized in 2016 in Berkshire’s Repurchase Level is not a “Floor”. Buffett has made it abundantly clear that he will never “support” the stock and initiate repurchases merely because it is falling and he wishes to stop a further decline.

So what can we infer based on the apparent ~$5 billion of repurchases that likely took place over the past two months?

It seems likely that Buffett’s views of the range of possible economic outcomes related to COVID have narrowed somewhat, and that he might view the very worst outcomes as less likely than he did when he spoke at the annual meeting on May 2. To be more precise, his views were likely more positive at the time the repurchases were made, and we do not know the exact timing. At the time of this article, published on July 13, the level of COVID infections, the rate of tests turning up positive, and other metrics have again taken a turn for the worse and several states have implemented new social restrictions and business closures.

Many commentators have noted that Berkshire’s equity portfolio, as reported on Form 13-F, appreciated strongly during the second quarter and into the first half of July. This appreciation has been driven by the extraordinary move in Apple shares which are close to breaching the $400 level. Berkshire owned 245,155,566 shares of Apple as of March 31, a position that is now valued at nearly $97 billion, up from $62.3 billion on March 31. Due to recent changes in accounting rules, the tens of billions of dollars of market appreciation in Berkshire’s equity portfolio will show up as tens of billions of dollars of “net income” when second quarter earnings are released.

It is not likely that the appreciation of Berkshire’s equity portfolio alone prompted Buffett to repurchase Berkshire stock. Although it is true that Berkshire’s book value is now far greater than the $229,358 per A share reported as of March 31, Buffett almost certainly has his own assessment of the intrinsic value of Berkshire’s equity portfolio. His own assessment of the intrinsic value of the portfolio, as well as the intrinsic value of Berkshire’s operating companies, is what will inform his thinking when it comes to calculating Berkshire’s intrinsic value. If shares can be purchased at a sufficient discount to that value, and if he views the range of overall economic outcomes as being acceptable from a risk standpoint, it is likely that he will repurchase shares. If the discount is not wide enough, or if he views the range of outcomes as too wide or skewed to the negative side, he will hoard cash.

Although Buffett does give periodic interviews, he has been notably quiet over the past ten weeks since the annual meeting. Few businessmen in America have a collection of companies in as many diverse sectors of the economy and Buffett is well positioned to personally observe the impact of COVID. He also has direct access to Bill Gates, Anthony Fauci, and other expects regarding pandemics. The repurchase activity implied by the recent SEC filing is good news in the sense that Buffett must have been more optimistic when he initiated those repurchases than he was on May 2. However, shareholders should not make too many assumptions beyond that until the second quarter report is released in early August. The COVID pandemic is by no means over and Buffett has demonstrated that he will change his mind as the facts change.

Disclosure: Individuals associated with The Rational Walk LLC own shares of Berkshire Hathaway.