Greg Abel Just Gave Investors $4.5 Billion Reasons to Take a Closer Look at Berkshire Hathaway
Key Points
Berkshire Hathaway bought back $4.5 billion in shares in the second quarter.
Berkshire is only allowed to buy back shares when its top leaders agree the stock is cheap.
This is Berkshire's first notable buyback activity since early 2024.
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Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) bought back $4.5 billion in stock in the second quarter, its first major buyback activity since early 2024. While other companies buy back billions of dollars in stock, Berkshire's buyback program is a unique one.
Specifically, Berkshire buys back stock only when its leaders believe it trades at a considerable discount to intrinsic value. This lets investors use Berkshire's buyback as a signal that the stock might be cheap.
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Berkshire's $4.5 billion buyback
Of course, there's more to the story. For one thing, Berkshire started the second quarter with a record high $397.4 billion in cash and Treasuries, and new CEO Abel has been eager to find ways to put it to work.
Also, the second quarter's buyback could be an especially strong signal that Abel believes the stock is cheap right now. Not only is $4.5 billion the most Berkshire Hathaway has spent on buybacks in a single quarter since 2021, but Berkshire's buybacks in recent years have generally occurred while Berkshire was a net seller of stocks.
In contrast, the second quarter saw Berkshire aggressively buy back shares while also investing heavily in other stocks. It wasn't just Berkshire's default use of cash when it couldn't find anything else attractive to buy. Greg Abel clearly sees investment opportunities and believes Berkshire's stock is cheap.
It's also important to put the buyback into perspective. Buying back $4.5 billion worth of shares means that Berkshire repurchased less than one-half of one percent of its outstanding shares. Annualized, this represents a rate of about 1.8% of shares. It's on the aggressive end of the spectrum for Berkshire, but it isn't exactly a table-pounding declaration that the stock is cheap.
The bottom line
Berkshire's buyback clearly indicates that Greg Abel and Warren Buffett (who still plays an active role as Chairman) believe the stock is undervalued. Of course, management can be wrong, and Buffett will be the first to admit that he's been wrong many times throughout his career.
Having said that, it's important to do your own homework. It's never a great idea to buy any stock just because a company is ramping up buybacks. But if you can make the case that Berkshire is worth more than its current market cap of about $1.09 trillion, which means that you agree with Abel and Buffett that the stock is undervalued, now could be a good time to take a closer look.
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Matt Frankel, CFP® has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
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