Investing.com – There has been a lot of talk lately about Warren Buffett’s decisions to sell some of his top stocks. Berkshire Hathaway (NYSE:). The Oracle of Omaha made the largest stock sale in Berkshire Hathaway history when it sold half of its shares in Apple (NASDAQ: ) last quarter. Recently, he has been selling shares of Bank of America (NYSE:) worth billions of dollars, writing Motley Fool.
Both of these moves represent big changes for Buffett that investors shouldn’t ignore. Despite the fact that Buffett sold shares for 7 quarters in a row, he always bought shares of one particular company using the money from the sale and money from Berkshire’s operating activities.
Last year, he spent $9.2 billion on shares, the largest purchase of company shares among his investment options. He continued to buy shares in the first quarter, adding $2.6 billion, But in the last quarter, Buffett spent only $356 million on shares, and in June he abandoned them completely.
The sudden lack of interest should worry Berkshire Hathaway investors because Berkshire Hathaway itself was the stock that Buffett regularly bought until the last quarter.
Buffett has been buying Berkshire Hathaway shares since the 1960s. He first did this as a portfolio manager for Buffett Partnership Ltd., when Berkshire Hathaway was a struggling clothing company. In 1965, he acquired a majority stake and immediately took over as CEO. It would be another 46 years before he bought back shares as CEO, when Berkshire Hathaway introduced its first stock buyback program in 2011.
After a long pause in share repurchases due to restrictive language in the repurchase authority, Berkshire’s board of directors changed the position in mid-2018. The new repurchase authorization allows Buffett shares of Berkshire Hathaway repurchases whenever it determines that the stock is trading below its conservatively estimated intrinsic value. The only thing is that the company must maintain a balance sheet of $30 billion in cash or Treasury bills.
Since the license change, Buffett has repurchased shares every quarter. But the $356 million it spent on buybacks last quarter is the lowest it has spent so far.
And it’s not a lack of money. Berkshire ended the quarter with $277 billion above average in cash and cash equivalents. Net operating cash flow for the first half of the year was $24.2 billion (although management warns that figure will drop now that the company will have to pay a hefty tax on the shares sold). The simplest explanation is that Buffett didn’t think Berkshire Hathaway stock was a good value in the second quarter.
Buffett believes that buying back stock is the best way to return money to shareholders.
Dividends are a guarantee from the business. Barring major changes in business prospects, it will pay shareholders a fixed amount each year (or more often). And this number usually increases over time.
Buffett believes this is ineffective. The ability to choose when to return money to shareholders through share buybacks means he is free to seek better investment opportunities without restrictions on how he uses the company’s money.
Importantly, Buffett notes that buybacks only make sense when shares are trading below their value. “All share repurchases should be price sensitive,” he wrote in his 2023 letter to shareholders. “What is sensible when done at a discount to the value of the business is stupid when done at a high price.” “
So, if Buffett isn’t buying back stocks and his company has more cash than the Fed, that suggests he doesn’t think stocks offer good returns and that the expected yield on Treasuries is better than Berkshire Hathaway’s current stock.
Buffett certainly knows more about Berkshire Hathaway, its actions, and what’s next for the company than anyone else. But his decision to significantly slow share buybacks is more of a warning sign than a direct sell signal.
Perhaps this reflects his view of the value of the entire stock market, not just Berkshire Hathaway shares. Berkshire Hathaway’s price/book value is around 1.5. That’s expensive, but not that much because the stock has consistently traded between 1.4 and 1.5 multiples over the past few years. But most of that value comes from Berkshire’s stock portfolio. And if Buffett believes that many of the stocks in Berkshire’s portfolio are trading above their true value, that means their book value may be overvalued.
Meanwhile, Berkshire’s underlying operations remain stable, and the growing cash position provides significant downside protection. If we see a major market downturn, few will be better positioned to benefit than shareholders Warren Buffett and Berkshire Hathaway.
2024-08-13 10:58:00
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