In 2018 the company repurchased US$418 million of its own shares.
“It is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value” Mr Buffett said.
“The math of such purchases is simple: each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality,” he said.
“Assuming that we buy at a discount to Berkshire’s intrinsic value – which certainly will be our intention – repurchases will benefit both those shareholders leaving the company and those who stay.”
Most of the group’s funding or acquisitions comes from equity. As Mr Buffett points out in his letter, Berkshire Hathaway uses debt “sparingly”.
“Many managers, it should be noted, will disagree with this policy, arguing that significant debt juices the returns for equity owners. And these more venturesome CEOs will be right most of the time. At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal,” he said.
“A Russian roulette equation – usually win, occasionally die – may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don’t risk what they have and need for what they don’t have and don’t need.”
Most of the debt you see on Berkshire’s consolidated balance sheet resides in its railroad and energy subsidiaries, both of them asset-heavy companies.
“During recessions, the cash generation of these businesses remains bountiful. The debt they use is both appropriate for their operations and not guaranteed by Berkshire.”
The group’s level of equity capital is a very different story.
“Berkshire’s $349 billion is unmatched in corporate America. By retaining all earnings for a very long time, and allowing compound interest to work its magic, we have amassed funds that have enabled us to purchase and develop the valuable groves earlier described.
“Had we instead followed a 100 per cent payout policy, we would still be working with the $22 million with which we began fiscal 1965,” Mr Buffett said.
