Buffett Shows His Appetite for Buying Stocks, Including His Own

(Bloomberg) -- The world's most famous stock-picker showed a growing appetite for equities in the third quarter -- including a rare move to buy his own firm's shares. Now, October's market slide opens the door for Warren Buffett to finally make a dent in his giant pile of cash.

Berkshire Hathaway Inc.'s chairman poured more money into stock purchases last quarter than he has in more than four years. Buffett also spent $928 million on share buybacks during a few weeks in August, a move he's typically spurned. While the repurchases amounted to less than 1 percent of the company's cash, they set a new precedent.

“It's really important in terms of a signaling effect,” Jim Shanahan, an analyst at Edward Jones, said in a phone interview. “What they've demonstrated is a willingness to use cash to buy back the stock if it reaches a value that they believe is less than intrinsic value.”

Buffett, 88, has been facing a conundrum. He's long preferred to use Berkshire's cash to hunt for large deals or snap up stocks in companies such as Apple Inc. and Coca-Cola Co. While it's still a goal to have “one or more huge acquisitions,” he's bemoaned that prices for many businesses have reached “all-time highs.” That's left him struggling to put to work a cash pile that's topped $100 billion in the past five quarters.

“Berkshire was a go-to entity” for deals in many years, Cathy Seifert, an analyst at CFRA Research, said in a phone interview. “But now there's a lot of competition in the M&A marketplace.”

Too much cash is a high-class problem, and one made possible by well-performing operations across the conglomerate's swath of energy, railroad and retail businesses. A rebound in the company's insurance unit led to operating profit doubling to $6.88 billion in the third quarter.

But sitting on such a large stack of cash has led to pressure from investors to use it or give it back to shareholders through buybacks and dividends.

“If this were any company that he owned, he wouldn't be able to understand why they aren't buying a ton of stock back,” Bill Smead, whose Smead Capital Management oversees $2.2 billion including Berkshire shares, said in a phone interview.

Berkshire's board acknowledged that pressure in July with a loosened repurchase policy, allowing Buffett and Vice Chairman Charlie Munger to buy back stock whenever they felt the shares were below intrinsic value. The previous policy limited them to purchasing stock only when the price was below a 20 percent premium to book value.

Buffett repurchased $1.2 billion from the estate of a long-time shareholder in 2012, but he's detailed to shareholders how he prefers to find other uses for that money unless prices make sense. During his annual meeting in May, Buffett said he would prefer share buybacks to a special dividend.

Now, the worst month for U.S. stocks in seven years has made several of his favorite companies significantly cheaper. Shares of Apple Inc., Berkshire's top holding, have dropped 8.1 percent since the end of September, while Bank of America Corp. has slumped 5.3 percent in that time period.

Fear in the market “creates prices that make me want to shovel out the money as fast as I can,” Buffett said in August in an interview with Bloomberg Television's David Westin. “But we've been shoveling out money anyway.”

He was able to chip away slightly at his cash pile during the third quarter, whittling it to about $104 billion from $111 billion at the end of June.

Despite prices that have thwarted any major deals, Buffett has found stocks he likes. He purchased $12.6 billion of equity securities on a net basis during the third quarter, the most in more than four years. A regulatory filing indicated Berkshire added billions to its stake in Bank of America in the third quarter, continuing a trend from the second quarter of adding to positions in financial stocks.

The market declines have also left Berkshire's shares below the price where Buffett bought them back, leading some investors to think he could dwarf the third quarter's total in the final three months of the year -- despite his feelings on buybacks.

“It's close to one of the last things he wants to be doing,” said Steven Check, president of Check Capital Management, which oversees $1.5 billion including investments in Berkshire. “He's avoided it pretty well for 50-plus years.”

To contact the reporter on this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Christine Maurus

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