Warren Buffett hasn’t seen a lot to like in the stock market recently.
While he added to some positions in Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B)portfolio in 2023 and started a couple of new ones, he’s been a net seller of stocks in each of the past five quarters. The strong performance of the stock market over the past 15 months has made it difficult for the Oracle of Omaha to find a lot of stocks worth sinking Berkshire’s growing cash pile into. As a result, the company ended 2023 with a record $167.6 billion of cash and equivalents on its balance sheet.
That said, there’s one stock Buffett hasn’t been able to stop purchasing. He bought shares every single month in 2023, and there’s a good chance he’ll continue to buy more this year.
That stock is none other than Berkshire Hathaway itself.
Giving shareholders a bigger stake in everything Berkshire Hathaway owns
Instead of adding to shares of anything in Berkshire Hathaway’s portfolio, Buffett views one of the best ways to increase investor’s exposure to Berkshire’s assets is through share repurchases. He explains in his 2023 letter to shareholders: “Though Berkshire did not purchase shares of either company in 2023, your indirect ownership of both Coke and AmEx [i.e., Coca-Cola and American Express] increased a bit last year because of share repurchases we made at Berkshire. Such repurchases work to increase your participation in every asset that Berkshire owns.”
When Buffett repurchases shares of Berkshire Hathaway on the open market, remaining shareholders subsequently own a larger stake of the company, and therefore all of the assets held by the conglomerate. But Buffett warns: “All stock repurchases should be price-dependent. What is sensible at a discount to business-value becomes stupid if done at a premium.”
Berkshire used to have a strict policy in place for its share repurchase program. Unless shares fell below 120% of their book value, Buffett couldn’t buy back any shares. The board amended the policy in mid-2018, enabling Buffett to buy back shares as long he believed the share price was below the stock’s intrinsic value, conservatively determined. He also must maintain at least $30 billion in cash and equivalents. Ever since, he’s bought back shares almost every month.
Will Buffett buy more in 2024?
It’s a good bet Buffett will keep buying shares of Berkshire Hathaway in 2024.
2023 purchases totaled $9.2 billion, an increase from 2022, when he repurchased $7.9 billion. That’s still down, however, from the massive sums Buffett spent buying back Berkshire stock in 2020 and 2021.
Despite the strong price performance of Berkshire stock to start the year, Buffett may still consider the shares undervalued. Operating income continues to grow, up 21% year over year, led by the strength of Berkshire’s insurance business. Moreover, Berkshire’s ability to generate huge sums of cash for shareholders is tough to beat. Its operating cash flow climbed to $49.2 billion last year, up from $37.4 billion.
Importantly, the cash pile at Berkshire is massive, and it’s only getting bigger. There are only a few things Buffett can do with cash.
- He can find a new business to acquire all or part of (i.e., make stock purchases).
- He can buy short-term Treasury bonds to maintain liquidity while waiting for an opportunity to acquire all or part of another business.
- He can repurchase shares of Berkshire Hathaway.
Unfortunately, the first isn’t viable at the moment, and the second doesn’t offer market-beating returns in the long run. (Berkshire shareholders are certainly enjoying higher interest rates right now, though.) One of the best long-term uses of cash for Berkshire at the moment is to buy back shares. Until a better opportunity presents itself, investors should expect Buffett to continue returning cash to shareholders with repurchases.
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