Berkshire Hathaway to buy back stock

Berkshire Hathaway Inc. is buying back its stock because Warren Buffett thinks shares are cheap

Berkshire said Monday that it would acquire an undisclosed amount of stock, provided that the purchase price is within 10% of book value and that the company’s cash holdings exceed $20 billion. The buyback will apply to Berkshire’s A and B shares and will “continue indefinitely,” the Omaha company said in a statement.

Berkshire, which is headed by Buffett, the legendary investor, has about $43 billion in cash. Its book value is now about $98,700 a share, according to Bloomberg.

“In the opinion of our board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise,” the company said.

Berkshire’s Class A shares surged $8,129, or 8.1%, to $108,449. The stock closed at a 52-week low of exactly $100,000 on Thursday. Class B shares rose $5.72, or 8.6%, to $72.09. Both share classes are down 10% for the year, compared with a 7.5% decline for the Standard & Poor’s 500 index.

Stock buybacks among big companies have increased the last two years, and topped $100 billion in the second quarter for the first time since early 2008, according to Standard & Poor’s. The $109.2-billion total was up 22% from the first quarter and 41% from a year ago.

But those numbers are a tad misleading. Rather than gobbling up shares because they’ve fallen to irresistible lows, many companies are doing so primarily to offset the effect of employee stock options, according to S&P.

When companies issue options, they need to buy back an equal number of shares to prevent their total number of shares from rising. An increase in total shares would dilute shareholder earnings, which no company wants to do.

But not many company managements are buying shares because they think they’re a bargain.

“Few companies are venturing outside of the box to purchase additional shares, as was the common practice from late 2005 through mid-2007,” said Howard Silverblatt, senior index analyst at S&P.

walter.hamilton@latimes.com