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Buffett Actions Hint at Berkshire Overvaluation

By Michael Carr   |   Wednesday, 16 Feb 2011 08:26 AM

Billionaire Warren Buffett agreed to buy almost 20 percent of little-known Wesco Financial for about $550 million. The most interesting part of the deal may be that Wesco shareholders can be paid in cash or Berkshire Hathaway stock.

In his most recent quarterly report, Buffett indicated that Berkshire had almost $35 billion in cash on hand. Obviously that’s enough to pay for Wesco and still have a comfortable reserve left over for other opportunities that come along.

However, Buffett knows value.

Instead of parting with cash, he is allowing Wesco’s owners to decide if they’d rather cash or a share on the future earnings stream of Berkshire Hathaway. As recently as 2008, Buffett was acknowledging that using his stock to fund acquisitions could make small errors worse by diluting earnings in Berkshire.

Since then, Buffett has used stock in the acquisition of railroad Burlington Northern and now Wesco Financial. Knowing that he likes to buy at bargain prices, it seems likely he believes cash is worth more than his own stock right now.

For many years Buffett has warned investors that it will be difficult to maintain his company’s earnings growth rate as the company becomes larger and larger. His actions now support these earlier statements. If he felt he could continue compounding his earnings at a rapid rate, he’d probably be hesitant to give up ownership in Berkshire.

If a dollar of cash appears to be worth more than a dollar of Berkshire stock to Buffett, investors should be paying attention.

Buffett has famously said, “If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.”

If he’s selling, is now really a good time to be buying?

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MichaelCarr
Billionaire Warren Buffett agreed to buy almost 20 percent of little-known Wesco Financial for about $550 million. The most interesting part of the deal may be that Wesco shareholders can be paid in cash or Berkshire Hathaway stock. In his most recent quarterly report,...
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2011-26-16
 

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