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Berkshire Hathaway’s Strategy on Payouts and Acquisitions

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Berkshire Hathaway’s (BRK.B) cash level has consistently increased over the past two years, and it stood above $100.0 billion on December 31, 2017. The company hasn’t engaged in aggressive acquisitions primarily due to higher valuations across the sectors. Although it has long adopted a no-payout strategy, it altered this policy in 2011 to accommodate repurchases.

These repurchases are expected to take place subject to a premium of not more than 20.0% over book value for Class A and B shares through either private placements or open market purchases. These repurchases would be further restricted in a way that overall liquidity of the company shouldn’t go below $20 billion.

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Repurchases to stay in policy

Berkshire Hathaway (BRK.B) hasn’t engaged in repurchases in recent quarters. Its current price-to-book multiple stood at 1.6x, reflecting a substantial premium over its accepted multiple of 1.2x.

In the case of acquisitions or repurchases, Berkshire Hathaway has stuck to its principles of a value buy. It might add companies when its managers identify value propositions along with strong growth expectations.

In contrast, bankers and asset managers (XLF) like BlackRock (BLK), Bank of America (BAC), and JPMorgan Chase (JPM) have continued with the repurchases amid higher stock prices or valuations.

However, over the medium to long run, Berkshire Hathaway may decide to look at investment avenues or distribute the excess reserves in the form of dividends or repurchases with amended policies. Globally, stock prices have receded amid expectations of higher interest rates. Hence, it might lead to an opportunity for Berkshire Hathaway to add companies at attractive valuations.

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