A lot has been made of Warren Buffett’s recent decisions to sell portions of Berkshire Hathaway‘s (BRK.A -0.21%) (BRK.B 0.03%) top equity holdings. The Oracle of Omaha made his biggest stock sale in the history of Berkshire Hathaway when he cut the company’s stake in Apple in half last quarter. More recently, he’s been selling billions of dollars’ worth of Bank of America stock.
Both moves represent major shifts for Buffett that investors shouldn’t ignore. But while Buffett has been a net seller of stock for seven straight quarters, he’s consistently purchased one particular stock with the sales proceeds and the cash generated by Berkshire’s core operations.
The $9.2 billion he spent buying shares last year made it his largest stock purchase for the company among all of his investment options. He continued buying the stock in the first quarter, adding $2.6 billion in purchases. But last quarter, Buffett spent just $356 million buying the stock, and completely avoided it in June.
The sudden lack of appetite should concern Berkshire Hathaway investors because the stock Buffett’s consistently bought until last quarter was Berkshire Hathaway stock itself.
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Buffett’s favorite stock to buy
Buffett has been buying shares of Berkshire Hathaway since the 1960s. At first he did so as the portfolio manager for Buffett Partnership Ltd., when Berkshire Hathaway was a struggling textile company. He bought a controlling stake in 1965 and promptly took over as CEO. It took another 46 years before he bought shares as CEO, when Berkshire Hathaway instituted its first share repurchase program, in 2011.
After a long drought in share buybacks due to restrictive language in the repurchase authorization, the Berkshire board of directors changed things in mid-2018. The new repurchase authorization allows Buffett to buy back shares of Berkshire Hathaway whenever he determines the stock trades below its intrinsic value, judged on a conservative basis. The only other caveat is the company must maintain $30 billion in cash or Treasury bills.
Since the change in the authorization, Buffett has bought back shares every quarter. But last quarter’s $356 million in buybacks is the lowest amount he’s spent so far.
And it’s not for lack of cash. Berkshire ended the quarter with a record $277 billion in cash and Treasury bills. Net operating cash flow for the first half of the year came to $24.2 billion (although management warns that number will decrease now that it owes a massive tax bill on all of its stock sales).
The simplest explanation is that Buffett didn’t think Berkshire Hathaway stock presented good value in the second quarter.
Buffett’s buyback philosophy
Buffett sees share repurchases as the best way to return cash to shareholders.
Dividends are a commitment from a business. Barring significant changes in the business prospects, it will pay shareholders a set amount every year (or often more frequently). And usually that number increases over time.
Buffett sees that as inefficient. Being able to use discretion on when to return cash to shareholders through a share repurchase means he’s free to pursue better investment opportunities without restrictions on how he uses the company’s cash.
Importantly, Buffett notes buybacks make sense only when a stock trades below its value. “All stock repurchases should be price-dependent,” he wrote in his 2023 letter to shareholders. “What is sensible at a discount to business-value becomes stupid if done at a premium.”
So, if Buffett isn’t buying back shares and his company owns more Treasury bills than the Federal Reserve, it suggests he thinks the shares don’t offer good value and the expected return from T-bills is better than Berkshire Hathaway’s stock right now.
Should investors sell Berkshire Hathaway?
Buffett certainly knows more about Berkshire Hathaway, its operations, and what’s in store for the company than anyone on the planet. But his decision to significantly slow share repurchases is more of a warning sign than an outright sell signal.
It may reflect his opinion about the value of the overall stock market more than just Berkshire Hathaway stock. Berkshire Hathaway’s price-to-book value is about 1.5. That’s expensive, but not terribly so considering shares consistently trade between a multiple of 1.4 and 1.5 over the last few years. But a large portion of that book value consists of Berkshire’s equity portfolio. And if Buffett believes many of the stocks in Berkshire’s portfolio trade above their true value, that means the book value may be over-represented.
Meanwhile, Berkshire’s core operations remain strong, and the growing cash position create significant downside protection. If we do see a significant market downturn, few people are better positioned to take advantage of it than Warren Buffett and Berkshire Hathaway shareholders.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
