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Is Warren Buffett Losing It With Berkshire Buyback?

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Your Money: Buffett backs B of A and buybacks of Berkshire

By Erin E. Arvedlund

Inquirer Columnist

Has Warren Buffett gone insane? Or is he just crazy like a fox?

The Oracle of Omaha, Berkshire Hathaway Inc. chairman Warren Buffett, has often said share buybacks are a waste of money. He has never done a share repurchase of his own company’s stock.

But now Berkshire will buy back an unlimited number of its shares whenever, in Buffett’s judgment, they trade below their intrinsic value. Berkshire Hathaway must not know what to do with $47.9 billion in cash on its balance sheet – except boost its own stock price.

The cheapest way for mere mortals to invest the same way Buffett does is by purchasing Class B shares of Berkshire Hathaway. These are far less expensive than the Class A stock, which trades at around $106,000 per share.

While many of us can’t be Buffett investors, the chairman’s buyback strategy is another symptom of a rare and roiled market.

In after-hours trading Friday, Berkshire Hathaway Class B shares (symbol NYSE: BRK.B) were fetching $70.78, down about 2 percent and in line with the U.S. stock market, which sold off brutally late in the day. The shares closed at $70.06 Monday.

Pat Dorsey, head of research at Sanibel Capital L.L.C., which oversees $503 million in assets, defends Buffett’s buyback decision. “He doesn’t like buybacks done for no reason or the wrong reason, meaning they are done to sop up shares and at too high a price.”

Buffett has no issue with buybacks “at the right price,” Dorsey added, noting that public companies should have been eagerly buying back their own stock during the financial crisis of 2008, when equity valuations were low.

Buffettologists argue that Berkshire Hathaway is trading at close to book value; the stock has been hit by insurance payouts for the latest round of hurricanes and earthquakes. Also, Buffett still has no clear successor. The odds are long that this decade’s returns by the company will be same as the last few decades.

All that negative sentiment has depressed the share price, Buffett’s boosters contend. But Buffett still makes savvy plays, they argue, by cutting the latest deal to invest $5 billion in senior preferred shares of turmoil-ridden Bank of America, which is trading at just over $6 a share. That stock hasn’t seen these lows since the financial crisis in 2008. B of A is the worst-performing Dow component stock of the third quarter 2011, down 42 percent. The bank’s performance is closely followed by Alcoa’s 37 percent drop, and the 35 percent decline for Hewlett-Packard.

So what’s the wager? Buffett’s bet was not that Bank of America’s stock is cheap, “But that they stay solvent,” Dorsey said. “He thinks Bank of America has a massive low-cost deposit base and it is unlikely the Countrywide Mortgage mess (B of A bought the hugely troubled mortgage-lender) will take down the whole franchise.”

$5 debit card fees

Speaking of questionable moves, Bank of America last week stunned its customer base by charging $5 a month to some debit card users, starting in January 2012. That fee is in addition to any checking account fees they might already be paying. The bank won’t charge its customers for ATM transactions.

Free checking accounts are not always without fees, according to Bankrate.com. You can be limited to how often you can withdraw money from ATMs, how many checks you can write in a month or how much you use your debit card. Going over these limits can be a fee bonanza for the banks, whose average monthly fees add up to $13 already, according to Bankrate.com, which also compares rates for Internet-only banking.

USAA, which caters to military families, does not charge for debit card usage, and in the wake of Bank of America’s news, said it will continue that policy. Consumers could also make the switch to a credit union, but should always check to see if an account will be insured. For a complete list of Pennsylvania credit unions – with 3.5 million members totaling $35.7 billion in assets – check outwww.creditunionsonline.com.

One response

  1. Berkshire Hathaway is undervalued. Take a look at this new book. MOATS is a look at 70 profitable Berkshire Hathaway business investments. Moats is about the competitive advantages of each business and it is targeted towards business school students, investors, and business managers. MOATS: The Competitive Advantages of Buffett and Munger Businesses http://www.amazon.com/dp/1105422860

    March 4, 2012 at 9:54 pm

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