Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Berkshire Hathaway Inc. (BRK.B) & Two Other Financial Powerhouses Showing You the Money

There are different ways in which the value of a stock can grow. The most typical example is when the value of the whole company increases over time due to growing cash flows and earnings.

Another one, related to share buybacks, is when the company is sliced into fewer pieces – fewer shares outstanding – and each individual share is worth more because it’s entitled to a bigger percentage of the company’s earnings and cash flows.

hedge funds vs. mutual funds

Creating value through buybacks
According to Warren Buffett, who understands a thing or two about capital allocation, buybacks can be a great thing for investors when the right conditions are in place. From Berkshire Hathaway Inc. (NYSE:BRK-B)‘s 2011 shareholder letter: “Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.”

Following these guidelines, Buffett has designed for Berkshire Hathaway Inc. (NYSE:BRK-B) what is arguably the most efficient and transparent buyback policy around. The company will repurchase shares provided it has more than $20 billion in cash at hand for different uses, and the stock must also be trading at an attractive valuation, which Buffett has defined as a price to book value ratio below 1.2.

Buffett has only been able to repurchase small amounts of stock under Berkshire Hathaway Inc. (NYSE:BRK-B)’s strictly defined policy, but he has provided valuable principles to keep in mind when analyzing other companies and their repurchase programs.

Two businesses are better than one
With more than $703 billion in assets under management and administration, Ameriprise Financial, Inc. (NYSE:AMP) is one of the leading financial services companies in the U.S. Over the last few years the company has expanded its asset management operations via acquisitions like J. & W. Seligman in 2008 and Columbia Management in 2010.

Ameriprise Financial, Inc. (NYSE:AMP) generates nearly equal amounts of income from its insurance and asset management segments nowadays, and this provides a nice combination for the company. While asset management generates high returns and low capital requirements, the insurance business produces recurrent and stable cash flows.

The business is performing strongly; operating net revenues increased 17% and operating earnings grew by 39% in the last quarter. The stock is reasonably valued with a P/E ratio of 16 and a dividend yield of 2.1%, so management is doing the right thing by aggressively repurchasing stock.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.