Berkshire Share Repurchase -- First Time Since 2000

The two principle reasons for a stock repurchase are to return cash to shareholders [in a relatively tax efficient way] and to support the stock price [usually pitched as an opportunistic purchases below value rather than simple price support].

The Berkshire announcement is clearly not intended to simply return cash to shareholders. It is explicitly intended to be opportunistic, which is supported by an explicitly announced metric for quantifying value.

It can be thought of as an option -- the Buffett put. Forget for a moment that it doesn't have a fixed strike price, and does not include mandatory exercise rights.

Rather it is a statement of corporate policy regarding deployment of excess cash. That is, the put is backed by corporate policy. It shouldn't be forgotten that the quality of this is enhanced by Berkshire's cash as well as its reputation.

A mandatory option at a fixed strike would be expected to set a floor for the stock price. As such, its value would be roughly comparable to options available in the market today. Berkshire's 'Policy Put' for lack of a better term would have a value based on the markets perception of the ability and willingness of Berkshire to implement the policy.

A cursory view of the current market prices of Berkshire at the money puts shows that they are valuable. An at the money 15 month put can be purchased for 10% to 15% of the price of a share.

The 'Policy Put' is inferior in every respect to this benchmark, except for the fact that the 'Policy Put' is perpetual. But the time value of available at the money put options is the most important part of their price.

As such, this 'Policy Put', in theory should add significant value to the price of the stock.

This attempt at quantification is highly speculative, but intended to illustrate at least one perspective on its impact to shareholders.

The larger point is that the policy is unique, it is explicitly intended to support the stock price and any purchases are opportunistic based on a pre announced metrics.

As such, it explicitly addresses the numerous problems that Buffett has previously identified regarding repurchases of Berkshire stock.

And, if it does set a meaningful floor on market price, shareholders should be significantly rewarded for this policy change.

REPLY Great minds think (almost) alike. See my next blog post about my Bloomberg article on the nature of the put.

Alice,

This also plays into your theory about a slow transition of power for Buffett. They have always said that if the share price declined too much after Buffett left the scene, there is enough liquidity to repurchase shares. In addition, the low stock price to intrinsic value means that the Gates Foundation is having to sell BRKB stock at depressed levels and is not getting its money's worth. I'm not saying this was a driving reason for the announcement, but presumably WEB cares about the work of the charities and would like to get the maximum bang for the buck. I veiw this as a welcome sign and it restores my faith that WEB cares deeply about his shareholders.