Buffett is breaking new ground for using cash as buybacks surge

The famed investor’s Berkshire Hathaway Inc. spent the third quarter repurchasing about $9 billion worth of its own stock, more than a full year in its history. The spending spree brings total buybacks to $16 billion for the first nine months of 2020, and the recent pace would be the largest of any U.S. company except Apple Inc., which happens to be Buffett’s largest investment.

Buffett, 90, has struggled for years to find attractive deals that would invest his cash pile in higher-yielding assets to fuel his conglomerate’s growth. In recent years, he has reversed his long-held aversion to stock buybacks. Now, buybacks led its capital deployments in the quarter, alongside a roughly $6 billion investment in Japanese trading houses, a bet on Snowflake Inc. and a natural gas equipment deal.

“You start talking about a pretty significant amount of cash that went into work,” Edward Jones analyst Jim Shanahan said in a phone interview that they’re finding ways to make money work, I think a significant one Crowd.”

The buybacks allowed Buffett to drain Berkshire’s cash pile in the third quarter, with that war chest dipping slightly to $145.7 billion, the company said Saturday. The funds, which still give him ample capital for acquisitions, stock purchases, or buybacks, have recently accumulated faster than Buffett can deploy them to higher-yielding assets.

The increased buybacks may indicate more optimism in the conglomerate’s prospects, just months after Buffett told Berkshire shareholders at the May annual meeting that buying back shares wasn’t any more compelling than it was when the stock was much higher pre-pandemic was.

Berkshire’s shares rose 20% in the third quarter, outpacing the S&P 500 Index’s 8.5% gain over the same period. The company accelerated its buybacks even as shares rose during the quarter. Still, Berkshire shares are cheaper overall than they were late last year, with Class A shares down 7.6% through Friday’s close.

The buybacks likely continued into October. Saturday’s filing shows that Berkshire’s stock count has actually declined through Oct. 26, suggesting that Berkshire spent at least $2.3 billion on share buybacks during those weeks.

“The vigorous buybacks suggest that at least one lever that can be pulled more when the price falls is the one that does,” said Thomas Russo, who has more than $9 billion at Gardner, including Berkshire stock Russo & Gardner LLC said in a telephone interview. “I am very happy about this commitment.”

operating result

The conglomerate’s businesses have recovered slightly from the depths of the second-quarter slump. The railroad’s profit, while still lower than a year ago, was higher than in the three months ended June 30, and Berkshire’s utilities posted their highest quarterly profit in more than a decade. Still, operating profit fell 32%, hurt by the insurance unit’s first underwriting loss since late 2019.

Buffett’s businesses have been hit by the pandemic this year. Aerospace parts maker Precision Castparts, which was hit by a $10 billion charge in the second quarter, reported an 80% decline in pretax profits in the three months ended September 30, “Earnings Declines” this year.

Berkshire’s board of directors announced a policy change in July 2018 that allowed Buffett and his business partner Charles Munger to buy back shares if the price falls below what they believe is Berkshire’s intrinsic value. Previously, they couldn’t make buybacks if the price was more than 20% above current book value.

“This concept of redistributing capital to shareholders was not necessarily a tenet of Berkshire’s operating policy,” Cathy Seifert, an analyst at CFRA Research, said in a phone interview. “In this environment, it’s becoming increasingly difficult for them to justify holding billions, billions of dollars in government bonds.”

Buffett’s appetite for stocks wasn’t limited to his own stocks. After Berkshire sold its most shares on a net basis in more than a decade during the second quarter, Berkshire reversed course in the months that followed, buying $4.79 billion worth of shares on a net basis during the third quarter.

The company’s investments delivered nearly $25 billion in investment gains amid the market rally and helped nearly double net income despite the decline in operating income.