Berkshire Hathaway’s Greg Abel Bought Back a Record $9.6 Billion of Stock Last Quarter. Here’s Why That Pace Might Not Continue.

Greg Abel just broke one of Warren Buffett's records as CEO of Berkshire Hathaway (NYSE:BRKA) (NYSE:BRKB). The CEO, who took over the job at the start of the year, bought back $9.6 billion worth of shares during the third quarter, beating the largest amount Buffett ever spent buying the company's stock in a quarter.

Abel has been keen to deploy more of Berkshire's cash, funding a huge investment in Alphabet this year, closing the acquisitions of OxyChem and Taylor Morrison, and restarting Berkshire's dormant share repurchase program. But investors expecting Abel to continue plowing cash back into Berkshire stock might be surprised by how quickly Abel cuts off buybacks.

Greg Abel. Image source: Getty Images.

Buffett's No. 1 rule for share repurchases

Warren Buffett is a huge fan of companies that return cash to shareholders via dividends and buybacks. However, he warns that not all buybacks are created equal. "All stock repurchases
should be price-dependent," he wrote in his 2023 letter to shareholders. "What is sensible at a discount to business-value becomes stupid if done at a premium."

When Berkshire Hathaway's board voted to revamp its share repurchase program in 2018, the biggest determining factor in whether the CEO could repurchase shares was the stock price relative to its intrinsic value. Previously, that intrinsic value was determined by Buffett and Vice Chairman Charlie Munger together. After Munger's passing, Buffett took sole responsibility. Now that Abel is CEO, he consults with the Chairman of the Board to determine the intrinsic value. That was Warren Buffett until a few weeks ago; now his son, Howard, sits in the seat.

That caveat is important. It means that as Berkshire's stock price climbs, Abel could suddenly stop buying back shares. That is, in fact, what has happened. Abel bought back an estimated $2 billion worth of shares in October, based on the reported share count in its 10-Q. However, the stock price climbed above its August high in late October, and it's continued climbing since.

The price-to-book ratio, which remained close to 1.4 for most of the third quarter, now stands at 1.6. It's worth noting that Buffett had previously stopped repurchasing shares while the stock traded near 1.5 times book value. At today's price, it seems unlikely he would approve of further share repurchases.

That said, the multiple at which Berkshire will buy back shares has climbed over time and should continue to climb with additional repurchases. Buffett explained in his 2018 letter: "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." Still, repurchases above 1.5 times book value seem unlikely in the immediate future.

Should you buy Berkshire stock before Abel buys more?

Berkshire Hathaway continues to produce solid results under Abel.

The insurance business has seen its net profits from underwriting decline considerably along with the rest of the industry, as pricing weakens, but that's in line with expectations. At the start of the year, Abel called out the company's railroad business, determined to increase operating margins to match industry leaders. The efforts appear to be paying off, with Burlington Northern's earnings climbing 19% year over year, better than the 15% earnings growth for Union Pacific.

Meanwhile, the company's energy business continues to deliver steady earnings growth, and the manufacturing, services, and retailing segment received a boost from the acquisitions of OxyChem and Taylor Morrison.

In other words, the business’s intrinsic value is steadily increasing, but not as quickly as the stock price has over the last few weeks. The sudden jump in the stock price stems from a flight to safety as the future for AI stocks has become murkier amid financing and political concerns. With a cash pile of $352 billion, Berkshire is extremely well positioned if a drop in AI stocks brings down the rest of the market. Whether that's worth paying a premium price for, though, is questionable.

Investors will find out if Abel thinks it's worth a premium these days in about three months. But considering his investment discipline and the ethos of Berkshire Hathaway, it's likely he'll wait for the stock price to pull back further before buying back more shares. Investors may want to do the same.

Adam Levy has positions in Alphabet and Union Pacific. The Motley Fool has positions in and recommends Alphabet and Berkshire Hathaway. The Motley Fool recommends Union Pacific. The Motley Fool has a disclosure policy.