Berkshire Hathaway’s (NYSE: BRK.B) ramped up its stock repurchasing program this quarter, sending shares were up 7% after-hours, following the announcement. It was revealed in Berkshire’s earnings report that the company bought back $9 billion of its own stock in the third quarter. This has been an encouraging development for shareholders who have witnessed the company’s shares lag behind the S&P 500 index by 40% since the end of 2018.
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Berkshire Hathaway’s Q3 Earnings Review
To combat the struggles of the pandemic, the company has focused on its stock repurchasing program by doubling the record buyback from the second quarter, which was $5.1 billion. This brings Berkshire’s total buybacks to $15.7 billion for 2020: $2.5 billion was spent on Class A shares, and the remaining $6.7 billion in Class B stock this quarter. This repurchase beat the UBS estimate for a total quarterly buyback of $3.2 billion. Berkshire Hathaway’s investment value soared, resulting in an 82% jump in its third-quarter profits. Berkshire announced that it earned $30.1 billion in the company’s Q3 earnings report, up from $16.5 billion a year ago. A large portion of the gains was owed to a $24.8 billion improvement in the estimated value of Buffett’s investment, which includes large holdings in Apple and Bank of America.
Buffett’s repurchasing program comes amid the company’s struggles with its operating earnings, which came in at $5.478 billion, down more than 30% (YoY). However, its net earnings skyrocketed over 82% (YoY) to $30.137 billion, thanks largely to Berkshire’s largest holdings. Apple, Berkshire’s largest stock holding, rallied 26% this quarter and Coca-Cola gained 10.5% over the same period. Back in August of this year, Buffett confirmed that Berkshire had taken 5% stakes in five leading trading organizations in Japan: Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co, and Sumitomo Corp. Buffett has made no other major acquisitions this year and even with the costly buybacks, the company’s cash pile still stood at $145.7 billion at the end of the third quarter. There is a massive amount of cash considering Berkshire also bought $2.1 billion in Bank of America stock this summer and paid $4 billion for Dominion Energy’s natural gas pipeline and storage company.
Berkshire Hathaway’s Repurchasing Plan
In his annual letter, sent earlier this year, Buffett stated that ‘’Berkshire will buy back its stock only if a) Charlie and I believe that it is selling for less than it is worth and b) the company, upon completing the repurchase, is left with ample cash.” He explained that over time he wants Berkshire’s share count to go down, and if the price-to-value discount widens, Buffett will become more aggressive in buying back the stock. Berkshire Hathaway’s Class A shares have experienced a 20% comeback this quarter, yet the stock is still underperforming the S&P 500 benchmark index in 2020. Shares are down 8%, versus the S&P 500 index’s 10% return this year.
The COVID-19 pandemic has had a huge effect on Berkshire’s railroads, utilities, and insurance businesses. In the company’s third-quarter earnings report, Berkshire stated that profits had fallen 8%, to $1.35 billion, at the railroads as the pandemic continued to slow freight traffic. The conglomerate holding company said that the railroad delivered 8% less freight in its third-quarter, which was an improvement from their second quarter when volume fell by 18% at the height of the global lockdown. The company’s utility unit profits were up this quarter due to higher tax credits for renewable energy projects, its Q3 report said that profits in the sector were up 18% from last year, to $1.395 billion. Berkshire did not enjoy the same success in manufacturing as its Precision Castparts aircraft parts company struggled with travel restrictions. The devastating impact coronavirus has had on aviation was made evident as Berkshire reported an 80% drop in its pretax earnings and announced it is expecting to cut 40% of its workforce by the end of 2020.
Eyes on Buffett
News of Berkshire Hathaway, the owner of over 90 companies, increasing its betting on its own investments should excite shareholders. Buffett has made relatively few big moves in 2020, so this buying spree will receive a lot of interest from investors on Wall Street.
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