Warren Buffett bought $9.2 billion of this stock last year, but suddenly he’s no longer interested

Much has been made of Warren Buffett’s recent decisions to sell portions of the Berkshire Hathawayhis (BRK.A -0.21%) (BRK.B 0.03%) top equity holdings. The Oracle of Omaha pulled off the biggest stock sale in Berkshire Hathaway history when it cut the company’s stake in the Apple in half of the last quarter. More recently, he has sold billions of dollars worth Bank of America stock.

Both moves represent big changes for Buffett that investors shouldn’t ignore. But while Buffett has been a net seller of stocks for seven consecutive quarters, he has consistently purchased some stock with the sales proceeds and cash generated by Berkshire’s core operations.

The $9.2 billion it spent buying stock last year made it the largest stock purchase for the company among all its investment options. He continued to buy shares in the first quarter, adding $2.6 billion in purchases. But in the last quarter, Buffett spent just $356 million buying the stock and avoided it altogether in June.

The sudden lack of appetite should concern Berkshire Hathaway investors, since the stocks that Buffett consistently bought until last quarter were Berkshire Hathaway stocks themselves.

Image source: The Motley Fool.

Buffett’s favorite stock to buy

Buffett has been buying shares of Berkshire Hathaway since the 1960s. He first did so as a portfolio manager for Buffett Partnership Ltd., when Berkshire Hathaway was a struggling textile company. He bought a controlling stake in 1965 and immediately took over as CEO. It took another 46 years for him to buy stock as CEO, when Berkshire Hathaway instituted its first stock buyback program in 2011.

After a long drought in share buybacks due to restrictive language in the buyback authorization, Berkshire’s board changed things up in mid-2018. The new buyback authorization allows Buffett to buy back shares of Berkshire Hathaway whenever he sets up deals with shares below their intrinsic value, judged on a conservative basis. The only other caveat is that the company must maintain $30 billion in cash or treasury bills.

Since the authorization change, Buffett has repurchased shares every quarter. But the $356 million in buybacks last quarter is the least it has spent so far.

And not for lack of cash. Berkshire ended the quarter with a record $277 billion in cash and T-bills. Net operating cash flow for the first half of the year came in at $24.2 billion (though management warns that number will drop now that it owes a massive tax on all stock sales).

The simplest explanation is that Buffett didn’t think Berkshire Hathaway’s stock showed good value in the second quarter.

Buffett’s buyback philosophy

Buffett sees share buybacks as the best way to return cash to shareholders.

Dividends are a commitment of a business. Barring significant changes in business prospects, it will pay shareholders a set amount each year (or often more frequently). And that number usually grows over time.

Buffett sees this as ineffective. Being able to use discretion when to return cash to shareholders through a share buyback means he is free to pursue better investment opportunities without restrictions on how he uses the company’s cash.

Importantly, Buffett notes that buybacks only make sense when a stock is trading below its value. “All share buybacks should be price dependent,” he wrote in his 2023 letter to shareholders. “What is reasonable at a discount to business value becomes stupid if done at a premium.”

So if Buffett doesn’t buy stocks and his company owns more Treasuries than the Federal Reserve, it suggests that he thinks stocks don’t offer good value and that the expected return on Treasuries is better than Berkshire Hathaway’s stock right now . .

Should Investors Sell Berkshire Hathaway?

Buffett certainly knows more about Berkshire Hathaway, its operations, and what’s in store for the company than anyone on the planet. But its decision to significantly slow share buybacks is more of a warning sign than an outright sell signal.

It may reflect his opinion of the value of the stock market as a whole more than Berkshire Hathaway shares. Berkshire Hathaway’s price-to-book value is about 1.5. That’s expensive, but not terribly so, considering the stock has consistently traded between a multiple of 1.4 and 1.5 over the past few years. But much of that book value consists of Berkshire’s stock portfolio. And if Buffett believes many of the stocks in Berkshire’s portfolio are trading above their true value, that means book value may be overstated.

Meanwhile, Berkshire’s core operations remain strong and its growing cash position creates significant downside protection. If we see a significant market decline, few people are better positioned to take advantage of it than Warren Buffett and Berkshire Hathaway shareholders.