Berkshire Hathaway Share Buybacks

Berkshire Hathaway (BRK.B), the holding company operated by billionaire and former richest-man-in-the-world Warren Buffett, has recently announced that it will commence share buybacks on shares of its own company. These purchases are to take place at no more than a 10% premium to the current book-value of the shares at the time of the purchases. Purchases will not be made if those purchases would push Berkshire’s cash and cash equivalents below $20 billion.

What can the astute investor take away from this recent piece of news? Historically, companies have decimated shareholder value by initiating large share buyback programs while their share prices are soaring. Buffett, however, is known to be a bargain hunter. He has been one of the greatest generators of shareholder value in the history of finance. In addition, Berkshire Hathaway just happens to be the one company he would understand from an intrinsic value standpoint better than anyone else and better than any other company he could possibly analyze. He has built it from the ground up alongside his long time partner, Charlie Munger.

There has long been speculation as to whether Berkshire Hathaway would initiate a dividend program at some point and it seems this would answer the question as to what the company will do with its overabundance of cash. I believe it is a prudent move as the company’s share price has fallen over the past while and moves into bargain territory. While some may view this move as Buffett and Munger throwing in the towel as to being able to find attractive investments elsewhere, I think it is simply a smart way to put shareholder money to work in an investment they understand better than any other. I’m always a fan of dividends, but Buffett has a proven track record that dictates he can continue to use the cash stored away as he sees fits. In fact, Berkshire Hathaway is the single company I have been considering purchasing despite its lack of dividend. I think of Berkshire largely as a mutual fund without management fees and it is run by one of history’s greatest investment teams.

Further still, the $20 billion minimum in cash that Berkshire Hathaway will continue to hold as a cushion against an unstable financial climate is an encouraging fact. This is the cash mountain that Buffett has often cited as being what allows him to sleep soundly at night despite the lower returns the company will earn on these funds.

Buffett has been known in the past to state when he feels his company is overvalued, so I am willing to take these repurchase plans at his blessing that the shares are undervalued – or at least they are when at no more than a 10% premium to book-value.

Full Disclosure: No position in BRK.B and no intention to initiate one within the next 72 hours.

Rogers Entering The Financial Services Arena

It has been announced that Rogers intends to enter the financial services industry with various credit offerings including credit cards. The company plans to leverage its already extensive reach amongst consumers to extend its base of product offerings. The proposed banking arm of Rogers would apparently not enter the realm of deposit-taking, but details are not altogether clear at the moment.

One of the obvious advantages to this idea would be the added diversification into a financial services industry that, in Canada, has historically provided very solid returns to those involved. It gives Rogers a chance to branch out and reap some of the profits to be had among others extending credit to consumers.

Among the downsides, this does sound like it may be a case of classic “disworsification”. Rogers does telecommunications very well. One has to wonder whether branching out in this way will simply muddy the waters regarding Rogers’ overall strategy going forward. I am reminded of the GEICO example outlined in Warren Buffett’s 2009 Letter to Shareholders where he states that when GEICO offered credit cards it wound up incurring significant losses before jettisoning the offering outright. The risk is that the wrong type of consumer who has been turned down repeatedly elsewhere winds up trying again, and for the very reasons they were turned down elsewhere to begin with, they end up as a bad debt for their debt holder.

Overall I would prefer to see Rogers not enter this arena as I feel they do tremendously well already in the industry they are in, but I’m definitely going to watch this one play out as an interested observer.

Full Disclosure: No position in RCI.B and no intention to initiate one within the next 72 hours.