Berkshire Hathaway Could Repurchase $20 Billion Of Stock

Berkshire Hathaway repurchased $1.2bn of its stock from a long-time shareholder in its most significant buyback ever. The company also changed the threshold for share repurchases to 120% of book value from 110% of book value, which places a floor on the stock in many ways and signals to many investors how strongly Warren Buffett feels Berkshire’s intrinsic value exceeds its stated book value. Could a shareholder dividend be next?

Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) currently trades at 1.17x 3Q12 book value (book value is $111,718 per A share and $74.48 per B share as of 3Q12), which is below the new level at which the company will repurchase stock. Using some of these numbers, it is possible that Berkshire Hathaway could repurchase $20 billion of stock as explained below.

Warren Buffett plans to maintain Berkshire’s cash holdings at a minimum of $20 billion. As of 3Q12, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s cash level is $42bn, and many estimate that it has annual earnings power of $14-$15bn. As a result,  Berkshire could have the ability to repurchase over $20 billion of its shares (roughly 9% of market cap) assuming no other additional major investments or acquisitions.

Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) could also deploy excess cash for acquisitions. Warren Buffett stated at the company’s annual shareholder meeting in May that by YE12 Berkshire could have the capacity to complete a $30bn cash acquisition. Barclays analysts believe that Chubb would be an attractive asset for Berkshire both from a strategic and a financial perspective. Barclays believes that CB would add a strong presence in primary commercial P&C and high-end personal lines insurance that does not overlap with BRK’s existing insurance businesses.

Furthermore, an acquisition of Chubb could also provide Berkshire a top-tier P&C insurer with approximately $27bn of cost-free float for investments that would deploy Berkshire’s free cash with a reasonable earnings yield. Barclays analyst would also anticipate attractive EPS accretion for Berkshire in an all-cash deal because The Chubb Corporation (NYSE:CB) would provide an earnings yield vs essentially no return earned by Berkshire on its cash.

Finally, for Chubb, a merger could address The Chubb Corporation (NYSE:CB)’s upcoming CEO succession issue (mandatory retirement for its CEO at year-end 2014), and bring The Chubb Corporation (NYSE:CB) into an organization that could allow it to operate autonomously.

Investors expect Berkshire Hathaway to generate good earnings growth from the Burlington Northern railroad and the Manufacturing, Service, & Retail units while Insurance earnings could be modestly higher and investment results could be volatile. CEO succession remains a risk, although less so since Warren Buffett’s CEO and investment management succession plan is now in place.

Disclosure: I have a long position in Berkshire Hathaway B shares