Words of Wisdom From Big Tesco PLC (TSCO) Backer Warren Buffett

When we are considering companies to invest in, we can check whether management has a good track record of adding shareholder value through making such acquisitions.

Repurchasing shares
Buffett is strict about when it’s right for a company to repurchase its own shares. Again and again over the years, he has stressed that the only time to do share buybacks is when the shares are available “far below,” “well below,” or “at a meaningful discount from” intrinsic value — and “conservatively calculated” intrinsic value at that.

Last year, Berkshire spent $1.3bn repurchasing its own shares. At the moment, Buffett is prepared to pay up to 120% of Berkshire’s book value for the shares.

So, if you’re interested in buying shares in Berkshire yourself, you have it from the horse’s mouth that 120% of book value represents a meaningful discount to conservatively calculated intrinsic value at the present time.

Dividends
Berkshire doesn’t pay dividends, but not because Buffett is against them per se. It’s simply that he has always seen opportunities in steps one to three for employing Berkshire’s cash flows more fruitfully for shareholders.

At the moment, the discount to intrinsic value is such that share buybacks are an efficient way for Berkshire to employ excess cash, but Buffett says that if things change materially “we will re-examine our actions.”

Buffett is perfectly happy for the quoted companies in Berkshire’s portfolio — American Express Company (NYSE: AXP), The Coca-Cola Company (NYSE: KO), International Business Machines Corp. (NYSE: IBM), and Wells Fargo & Co (NYSE: WFC) are his “Big Four” — to use excess cash to make share repurchases “at appropriate prices,” or to otherwise pay him dividends. He says: “We applaud their actions and hope they continue on their present paths.”

Buffett no doubt feels the same about his big U.K. investment in Tesco PLC (LON:TSCO), whose shares — at 380p — are currently trading on an historically low earnings multiple, and offer investors a healthy 4% dividend yield.

Berkshire’s 415,510,889 shareholding in Tesco (5.2% of the company) should net Buffett a dividend payout of something over £60m this year alone.

The article Words of Wisdom From Big Tesco Backer Warren Buffett originally appeared on Fool.com and is written by G.A. Chester.

G.A. Chester has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Tesco.

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