Berkshire Hathaway is continuing a trend of dwindling takeovers and concerns are growing. Warren Buffett recently chose to purchase almost $1 billion of the company’s own shares.
Boosting Berkshire Cash
Warren Buffett’s decision to inject nearly $1 billion of Berkshire Hathaway’s cash back into its own shares has underscored the shortage of appealing deals currently available to long-term investors. At the same time, turbulent markets also indicate that company valuations are as hot as they’re going to get.
This represents the first buyback in six years and is only a sliver of Berkshire Hathaway’s total cash reserves of $104 billion. It arrives at a time in which there has been nearly a year since the company has participated in a takeover.
Deal-Making Among Others
Buyout firms and other companies have driven deal-making to powerful levels. So far, there have been about $3.5 trillion in acquisitions that have been agreed upon in 2018. This represents a 30 percent increase over the same time last year, according to the Financial Times, quoting Refinitiv data.
That said, Berkshire Hathaway chief executive officer, Warren Buffett said he never looks to what other companies are doing when he guides his $509 billion conglomerate. Instead, he said he ignores timing the market in favor of investments into companies with business models that make sense to him and strong management teams in place.
Demands for Full Company Takeovers
When Berkshire is considering the outright acquisition of another company, Buffett said he demands a fair price.
“Maybe there aren’t very many companies that are willing to sell their business at a fair price,” suggested Edward Jones analyst James Shanahan. Buybacks are, for Berkshire Hathaway, “another clear and defendable use of cash,” he explained. “It is probably a less risky investment because they know their business better than they might a publicly traded company they would like to invest in.”
Some have suggested that this may indicate Berkshire is predicting a sooner slowing of the U.S. economy than investors had previously predicted.
New Take on Buffett’s Strategy
This is far from the first time the 88 year old investor has taken part in share repurchasing. Company acquisitions and investing in other firms’ shares are easily preferred by Buffett over capital return. At the same time, it has been challenging to discover new investment paths for such a massive pile of cash. Equally, this buyback policy has provided a new route for the money’s deployment.
Berkshire Hathaway has traditionally restricted repurchases when shares were trading at under a 20 percent premium to book value. This new take gives Buffett and Vice Chairman Charlie Munger the opportunity to decide when the company’s stock is trading under what they feel is the intrinsic value.