There has been much ado about Warren Buffett’s recent decisions to sell parts of Berkshire Hathaway‘S (NYSE: BRK.A) (NYSE: BRK.B) top equity holdings. The Oracle of Omaha made the largest share sale in Berkshire Hathaway history when it sold the company’s stake in Apple in the middle of the last quarter. More recently, he has spent billions of dollars Bank of America stock.
Both moves represent big changes for Buffett that investors shouldn’t ignore. But while Buffett has been a net seller of stocks for seven straight quarters, he has consistently bought one particular stock with the proceeds of the sale and cash generated by Berkshire’s core businesses.
The $9.2 billion he spent buying the stock last year made it his largest stock purchase for the company of all his investment options. He continued buying the stock in the first quarter, adding $2.6 billion to his purchases. But last quarter, Buffett spent only $356 million buying the stock, and avoided doing so entirely in June.
The sudden lack of interest should worry Berkshire Hathaway investors, because the stocks Buffett had been consistently buying up until last quarter were Berkshire Hathaway shares themselves.
Buffett’s Favorite Stocks to Buy
Buffett has been buying Berkshire Hathaway stock since the 1960s. He started as a portfolio manager for Buffett Partnership Ltd., when Berkshire Hathaway was a struggling textile company. In 1965, he bought a majority stake and promptly became CEO. It took another 46 years before he bought stock as CEO, when Berkshire Hathaway instituted its first stock buyback program in 2011.
After a long drought of share buybacks due to restrictive language in its buyback authorization, Berkshire’s board of directors changed things in mid-2018. The new buyback authorization allows Buffett to buy back Berkshire Hathaway shares if he determines the stock is trading below its intrinsic value, as judged on a conservative basis. The only other caveat is that the company must maintain $30 billion in cash or Treasury securities.
Since the authorization change, Buffett has bought back shares every quarter. But the $356 million in buybacks last quarter is the lowest amount he has spent to date.
And it’s not for lack of cash. Berkshire ended the quarter with a record $277 billion in cash and Treasuries. Net operating cash flow for the first half of the year was $24.2 billion (although management warns that figure will now decline, as it owes a huge tax bill on all the stock sales).
The simplest explanation is that Buffett didn’t think Berkshire Hathaway stock offered a good value in the second quarter.
Buffett’s buyback philosophy
Buffett sees share buybacks as the best way to return money to shareholders.
Dividends are a company’s commitment. Unless there are significant changes in its business prospects, it will pay shareholders a fixed amount each year (or more often). And that amount usually increases over time.
Buffett sees this as inefficient. By choosing when to return his money to shareholders through a share buyback, he can pursue better investment opportunities without restrictions on how he uses the company’s money.
Buffett emphasizes that stock buybacks only make sense if the value of a stock is below its original value.All “Share buybacks should be price-driven,” he wrote in his 2023 letter to shareholders. “What is smart at a discount to enterprise value becomes foolish when done at a premium.”
So if Buffett isn’t buying back stock and his company owns more Treasuries than the Federal Reserve, then he believes the stocks aren’t a good value and that the expected return on Treasuries is currently better than Berkshire Hathaway’s.
Should Investors Sell Berkshire Hathaway?
Buffett certainly knows more about Berkshire Hathaway, its operations and what lies ahead for the company than anyone on the planet. But his decision to significantly slow down share buybacks is more of a warning sign than an outright sell signal.
It could reflect his view of the value of the entire stock market, rather than just Berkshire Hathaway shares. Berkshire Hathaway’s price-to-book ratio is about 1.5. That’s expensive, but not terribly so, considering that stocks have consistently traded between multiples of 1.4 and 1.5 for the past several years. But a large portion of that book value is Berkshire’s stock portfolio. And if Buffett thinks many of the stocks in Berkshire’s portfolio are trading above their true value, that suggests book value may be overvalued.
Meanwhile, Berkshire’s core businesses remain strong, and its growing cash position provides significant protection from downside pressure. If we see a significant market downturn, few people are better positioned to profit than Warren Buffett and Berkshire Hathaway shareholders.
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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.
Warren Buffett Bought $9.2 Billion Worth of These Stocks Last Year, But He’s Suddenly No Longer Interested was originally published by The Motley Fool
