On Feb. 27, Warren Buffett (Trades, Portfolio) released his annual letter to the shareholders of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). As has come to be expected of the Oracle of Omaha, Buffett touched on many subjects in latest missive. However, one thing that stood out was Buffett's vigorous enthusiasm for Berkshire's ongoing share buyback program.
With buybacks set to continue for the foreseeable future, investors may soon find an opportunity for long-term positioning as the vital "A" shares continue to dwindle in number, increasing the voting power and influence of those that remain.
The buyback binge continues
Despite its relatively slow start, 2020 proved to be another bumper year for Berkshire in terms of stock buybacks. As Buffett explained in his shareholder letter, this has had a significant impact on Berkshire's share count, and the relative ownership rights of each surviving share:
"Last year we demonstrated our enthusiasm for Berkshire's spread of properties by repurchasing the equivalent of 80,998 'A' shares, spending $24.7 billion in the process. That action increased your ownership in all of Berkshire's businesses by 5.2% without requiring you to so much as touch your wallet."
Such buybacks have profound implications for shareholder value since reducing the float inherently increases the value of each remaining share in circulation. In the case of Berkshire, though, there is more to the story, as fellow GuruFocus contributor Rupert Hargreaves pointed out on March 2:
"In his annual letter, Buffett commented on the benefit of repurchases, particularly concerning high-quality businesses. He earmarked Apple as an example...When combined with Berkshire's own buybacks, the conglomerate's shareholders had increased their indirect ownership by 10% in the two and a half years since Buffett finished buying the holding."
In essence, buybacks have had the effect of giving shareholders increased ownership not only in Berkshire and its operating businesses, but also in a number of other best-in-class companies, such as Apple Inc. (NASDAQ:AAPL), that grace Berkshire's value-oriented investment portfolio. That is a pretty good deal by any definition.
Scarcity presents potential opportunity
Since May 2020, Berkshire has spent an average of $2.9 billion on buybacks every month. That comes out to about $35 billion in buybacks per year. If that pace continues, it would mean the retirement of more than 90,000 A shares per year at their current market price. That fact could help to shape a long-term investment opportunity, as The Rational Walk, a value-oriented analyst and investor with a wide following, discussed on March 2:
"The supply of A shares has been shrinking constantly since the Bs were introduced 25 years ago. Eventually, ALL of Buffett's A shares will be gone - converted to Bs and given away. Who will control Berkshire? The remaining A shareholders. In the great debates of the 2040s and 2050s regarding keeping Berkshire intact or splitting off parts of it, the A shareholders will make the decisions. I suspect this will command a premium if there is controversy."
What this means is that, as Berkshire continues to shrink the number of Class A shares in circulation, the voting power of the remaining shares will be amplified. Buffett has famously said that he intends to give away virtually all of his fortune when he passes away, a fortune that is largely composed of Berkshire stock. When that eventually comes to pass, the number of extant shares is likely to diminish considerably.
The power of Berkshire's A shares should not be overlooked. The economic difference between the A shares and B shares is well understood: Each A share grants 1,500 times the economic rights of each B share, hence their very different trading prices. However, it is the difference in voting rights between the two classes of share that really sets them apart. One A share equals one vote. Meanwhile, you need 10,000 B shares to equal a single vote.
Berkshire Hathaway is a sprawling conglomerate with interests in a host of profitable businesses. While investors have trusted Buffett to steer the ship with little input, his successors are arguably likely to face more scrutiny. Talk of "Berkshire after Buffett" has intensified in recent years, with many increasingly seeing the potential for the conglomerate to be broken up in some fashion in the years ahead.
A suitably patient value investor might well benefit in the coming years by expanding their exposure to Berkshire's Class A shares. While they might be more expensive, they provide an outsized seat at the table, a seat that could prove very valuable as Berkshire's post-Buffett fate is decided.