Buffett, Of All People, Should Know It Hurts Shareholders to Telegraph Buybacks Ahead of Time

One of my pet peeves is how frequently public companies announce stock buyback programs before they buy a single share. If you are buying back your stock because you believe it is undervalued, and you know that announcing your intentions is going to give a boost to the stock, you are essentially screwing over your shareholders. Why pay more than you have to for the shares you want to repurchase? Today we learned that Berkshire Hathaway (BRKa /BRKb) has authorized share buybacks at prices up to 110% of book value. I am kicking myself because I took a hard look at this stock last week, concluded it was very attractive, but didn’t rush in to buy any. After all, what catalyst near-term could possibly boost the stock that much in a volatile market? Well, a telegraphed buyback program is about the only thing. And today the “B” shares are up nearly $5, or 7%, to just under $71 per share. They looked good at $66, but much less so now.

Isn’t Buffett smarter than this? If he could have bought the stock at $66 why put out a press release and drive your potential cost basis up so much? Skeptics will say he has no intention of actually buying the stock… that it is just a way to give the stock a boost without committing any capital. Perhaps this will prove true (Buffett thought hard about it decade ago but never actually bought any) but I hope not. The stock really is cheap, and Buffett of all people knows this. I cannot figure out why he wouldn’t buy the stock first, and then announce the amount purchased and price paid. That too would give the stock a jolt to the upside, but it would actually benefit shareholders too. This announcement really seems silly. Other companies do it all the time, but I expect more from Buffett.

Some might argue that disclosing the buyback authorization is a Reg FD issue but I would respectfully disagree. Reg FD is supposed to protect certain investors from getting information earlier than others, thereby providing a level playing field for everyone. Failing to disclose the buyback plan ahead of time does nothing to give anyone a leg up on others. In fact, it treats everyone equally (nobody learns of the plan) and beneficially (all shareholders profit from the accretive nature of the repurchases, which were done at the lowest price possible).

We will see if Berkshire stock holds today’s 7% gain. If it does and Buffett doesn’t buy any shares, not only will this announcement have been a waste of time, but more importantly, he will have balked at a great opportunity to make money for Berkshire shareholders.

Full Disclosure: No position in BRKa or BRKb at the time of writing, but positions may change at any time

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8 Thoughts on “Buffett, Of All People, Should Know It Hurts Shareholders to Telegraph Buybacks Ahead of Time

  1. Hey Chad…not sure if this is true or not but someone on CNBC this morning said Buffet did this once before…announced shares were underpriced and he was going to buy them back and after the pop, never bought a share. Maybe he is smarter than that and know that just by saying he is going to buy them back, he gets the share price up. No cash required.

  2. Michael Kelly on September 26, 2011 at 1:33 PM said:

    “The fact that the issuer is planning a repurchase program of its own stock should generally be viewed as material and be disclosed through a press release.” – Dorsey & Whitney LLP. It looks like you do have to disclose to avoid insider trading liability.
    http://www.dorsey.com/Resources/Detail.aspx?pub=155

  3. Chad Brand on September 26, 2011 at 1:46 PM said:

    @Michael:
    What inside information would they supposedly have? Who would be disadvantaged by an unannounced buyback? If Buffett can buy more Coke stock (or any other large holding or new investment) without disclosing that ahead of time, I don’t see why Berkshire stock would be any different, assuming that the company always discloses material changes to its business. Seems to me you could certainly have a situation where nothing shady was going on. Oh well, maybe wishful thinking in today’s day and age.

  4. Michael Kelly on September 26, 2011 at 2:16 PM said:

    I agree that it sounds strange, but my recollection is that share repurchases are not considered “investments” like purchases of other firm’s shares. There are a whole bunch of anti-manipulation rules about repurchasing your own stock that would never apply to a large shareholder of another firm’s stock. Much of this, I believe, goes back to the pre-SEC days when firms would regularly trade in their own stock in manipulative ways. (Some of the stories from the late 1800s are incredible.)

  5. mutant_dog on September 27, 2011 at 3:40 PM said:

    I imagine the point of the announcement is to create a floor for the stock price, in advance of possible succession issues. As such, making any purchase contingent on book value and cash available is really clever. I see this as not unlike the SNB’s recent defense of the Franc, in that the size of the commitment is indefinite.

  6. I wrote about this yesterday.

    http://alephblog.com/2011/09/27/on-the-berkshire-hathaway-buyback/

    There are ways to do the buyback without making the price rise. As I wrote:

    “BRK could have struck a deal to do an accelerated share repurchase, without jolting the market, and pushing up the price of a repurchase. Perhaps it could have been done by simply announcing that the Board has approved buybacks, should the price ever become favorable for that, and then repurchase slowly and quietly.”

    I have owned stocks where they did the accelerated share repurchase, and you find out the day of the deal. Very effective in my opinion, so long as the cheapness is without doubt.

  7. Chad Brand on September 28, 2011 at 10:54 AM said:

    @Fred:
    Sorry, your comment was sent to “pending” and required approval for some reason…. just saw it today. I don’t know why Buffett would want to be in the business of propping up the stock. Why not take actions that actually make it “worth” more, rather than just issuing a press release that gets it to pop but doesn’t add any true intrinsic value to the shares. I suspect once the headlines subside the stock will fall back, especially if we get another market sell-off. That would be the best test of his intentions… will he actually buy it if it drops back to 66-67…?

  8. It’s a matter of (his) ethics. Buying back shares is a little unfair to the people selling. He doesn’t want shareholders to underpay or overpay for seats in his church.

    This may be the flipside of the squarz deal he did when berkshire was a little overpriced. (He essentially sold call options on berkshire when it was a little pricey.)

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