Warren Buffett is sending a clear signal that he believes Berkshire Hathaway's stock is undervalued by announcing a plan to repurchase stock for the first time since taking over the firm in 1965.
Berkshire said Monday that the company Buffett leads will repurchase its Class A and B shares anytime they are trading at less than 110 percent of book value.
Berkshire's Class A stock surged 8.1 percent, or $8,129, to close at $108,449 Monday. Its more affordable Class B shares rose $5.72, or 8.6 percent, to $72.09.
Book value is a measure of a company's value that Buffett often cites because it is similar to the intrinsic value figure he calculates to determine if an investment is overpriced. At the end of June, Berkshire estimated its assets were worth $98,716 per Class A share after liabilities were deducted.
That estimate doesn't include Berkshire's $9 billion acquisition of specialty chemical maker Lubrizol that was completed earlier this month.
Stifel Nicolaus analyst Meyer Shields said the repurchase announcement came as a surprise, but investors should realize that Buffett left the terms flexible so he hasn't committed to buying back any stock.
"He's just giving himself another tool to play defense with," Shields said.
Buffett talked about repurchasing Berkshire stock once before in his 1999 annual letter, but never did buy back shares because the price improved after he talked about it being undervalued.
Buffett did not immediately respond to an interview request sent to his assistant Monday.
Last week, Berkshire's Class A shares dipped below $100,000 for the first time since January 2010 as worries about the economy weighed down the overall market.
Andy Kilpatrick, the stockbroker-author of "Of Permanent Value, the Story of Warren Buffett," said Buffett has always said he wants Berkshire stock to trade at a fair price, and this move signals that he didn't agree with the recent prices.
"He's saying we're undervalued, and I'm putting cash here," Kilpatrick said.
Berkshire didn't commit to buying a certain dollar amount of stock, but the Omaha-based company said it wouldn't repurchase stock if doing so would reduce its cash on hand below $20 billion.
But that doesn't seem to be an immediate concern because Berkshire had nearly $48 billion cash on hand at the end of June.
David Rolfe, chief investment officer at Wedgewood Partners, said he was glad to see Buffett's announcement because Berkshire is one of the biggest holdings in Wedgewood's portfolio. Rolfe said the buybacks will be a good use for some of Berkshire's cash that will benefit long-term shareholders because Buffett will only buy the stock when it's undervalued.
"This is old-school Buffett corporate stewardship, and we applaud it," Rolfe said.
Birinyi Associates' researcher Rob Leiphart said the only other company with an open-ended buyback program like this is Exxon Mobil Corp., which announced its repurchase plan in 2000.
Berkshire doesn't have a history of stock repurchases, but America's biggest companies have been increasing the amount they spend buy their own stock. Standard & Poor's Indices says companies in the S&P 500 index spent 41 percent more on stock repurchases in this year's second quarter compared to last year. Those companies spent more than $109 billion on stock buybacks in April, May and June.
Berkshire's Class A hit an all-time high of $151,650 per share in December 2007. Its Class A stock remains the most expensive stock in the U.S., but it has declined since February when it was trading above $131,000 before several major disasters generated losses for Berkshire's insurance units. Berkshire recorded $1.7 billion in insurance losses related to the March 11 earthquake and tsunami in Japan, the Feb. 22 New Zealand earthquake and flooding in Australia.
When Buffett's investment partnership first bought Berkshire stock in 1962, the shares sold for $7 and $8 apiece. At that time, Berkshire was a New England textile firm.
Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms, but its insurance and utility businesses typically account for more than half of the company's net income. It has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.
Berkshire Hathaway Inc.: www.berkshirehathaway.com