On February 26, Berkshire Hathaway Inc. – the investment conglomerate run by legendary investor Warren Buffett – published its annual letter to shareholders in conjunction with the publication of its 2021 financial statements.
Warren Buffett’s annual letter is a widely anticipated publication by the international financial media since it always has some key messages to the investment community around the world.
In the most recent letter, Buffett gives an overview of the current structure of the investment conglomerate and also highlights the availability of $144 billion in cash. While he reiterates his pledge that Berkshire will always maintain a healthy cash balance to enable the company to be “financially impregnable”, the chairman acknowledged that the overweight cash holding is “as a consequence of my failure to find entire companies or small positions thereof which meet our criteria for long-term holding”.
In the introduction to the letter, Buffett explains that Berkshire owns a variety of businesses, either in their entirety or by acquiring minority stakes in publicly traded companies with the largest positions of the latter group being Apple Inc (December 2021 market value of $161.2 billion), Bank of America ($45.6 billion), American Express Company ($24.8 billion) and the Coca Cola Company ($23.7 billion), among numerous other.
The chairman of Berkshire highlights the investment philosophy as follows: “We own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves.” In fact, he claimed that they are not stock pickers but they are “business-pickers”. Buffett also states that, irrespective of whether they own a business as a whole or participate as a minority shareholder, “our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO”.
Despite the inability for Berkshire to deploy a large part of its cash balance over recent years, Buffett still claims they found a “a mildly attractive alternative during 2020 and 2021 for deploying capital” apart from the primary objective of increasing the “long-term earning power” of those business fully controlled by Berkshire Hathaway.
A share buyback could prove to be a good strategy to inject liquidity into the market
Buffet is referring to the share buyback programme conducted by Berkshire Hathaway. During 2020 and 2021, the company repurchased nine per cent of its own shares that were outstanding at the end of 2019, for a total cost of $51.7 billion. Moreover, during the first two months of 2022, additional shares were repurchased for a total of $1.2 billion.
The chairman explains that through this share buyback programme, the effective ownership of the underlying investments held by the company increases for the remaining shareholders. Buffett adopts a diligent approach on the timing of share buybacks and he states that “for Berkshire repurchases to make sense, our shares must offer appropriate value”. He argues that as Berkshire seeks to avoid overpaying when conducting acquisitions of other companies, “it would be value-destroying if we were to overpay when we are buying Berkshire”.
Buffett also claims that “when the price/value equation is right, this path is the easiest and most certain way for us to increase your wealth”.
Many of the large multinationals in the US and Europe conduct such share buybacks along customary cash dividends. In fact, in the recent letter, Buffett also praised Apple’s CEO Tim Cook for utilising part of Apple’s large cash pile to also repurchase outstanding shares. This enabled Berkshire to increase its equity stake in Apple to 5.55 per cent from 5.39 per cent a year earlier, without conducting any additional purchases. While he highlighted that the change in the minority stake may seem to be small, Buffett argued that “each 0.1 per cent of Apple’s 2021 earnings amounted to $100 million”.
Share buybacks are an effective way of distributing excess cash to shareholders. In Malta, only one company has so far conducted a share buyback. This was Plaza Centres plc when during the third quarter of 2020, it declared its intention to repurchase up to 10 per cent of its issued share capital following the sale of one of its properties.
Although few Maltese companies may have sufficient financial resources to conduct such share buybacks, another issue that might prohibit companies from carrying out such a corporate action would be the free float restriction imposed by the Listing Authority. This ought to be another reason for decisive action to be taken on the minimum 25 per cent free float threshold.
In view of the very illiquid nature of the Maltese capital market, which essentially makes it very difficult for large shareholders to liquidate part of their position or crystallise capital gains accumulated across the years in a short period of time, a share buyback could prove to be a good strategy to inject liquidity into the market.
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