Warren Buffett on Share Repurchases: Buy Below Intrinsic Value
The best analysis of when corporate share repurchases make sense can be found – where else? – in the annual shareholder letters of Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). Buffett is famous for his opposition to stock buybacks, waiting 40 years before finally agreeing in September 2011 to buy back some Berkshire stock. But in Berkshire’s 1999 shareholder letter, Buffett outlined the criteria management must satisfy before a buyback can be considered “good:”
Repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price. The shareholder who chooses to sell today, of course, is benefitted by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around.
Many companies now making repurchases are overpaying departing shareholders at the expense of those who stay. In defense of those companies, I would say that it is natural for CEOs to be optimistic about their own businesses. They also know a whole lot more about them than I do. However, I can’t help but feel that too often today’s repurchases are dictated by management’s desire to “show confidence” or be in fashion rather than by a desire to enhance per-share value.
We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders — and potential shareholders — the same valuation-related information we would wish to have if our positions were reversed.
Please be clear about one point: We will never make purchases with the intention of stemming a decline in Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the Company’s money.
Facebook’s decision to use $1.92 billion in corporate cash to buy 101 million shares of stock at $19 appears to satisfy Buffett’s criteria for repurchasing shares – if you accept professor Damodaran’s intrinsic value estimate of $23.94. Granted, a $19 purchase price is only 21% below the $23.94 intrinsic value and not the 25% discount Damodaran himself requires before buying at $18.
But I don’t think Mr. Buffett would quibble between a 21% and 25% discount. Facebook is buying the stock at a price “well below intrinsic value” and Mr. Buffett should be proud.
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