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Berkshire Hathaway is jumping after Warren Buffett signals buybacks are coming (BRK.A)

Kevin Lamarque/Reuters

  • Berkshire Hathaway is jumping Wednesday after the company loosened its share buyback policy. 
  • The conglomerate is under pressure to put excess cash to work. 
  • The loosened policy gives full discretion to Chairman Warren Buffett and Vice Chairman Charlie Munger to authorize buybacks if they deem the purchase price below the real value of the company. 
  • Berkshire will likely pursue buybacks after it reports second-quarter earnings, according to Morgan Stanley analyst Kai Pan. 
  • Watch Berkshire Hathaway trade in real time here.

Berkshire Hathaway's Class A shares are jumping as much as 4% to $299,890 apiece Wednesday morning. This is after the conglomerate said it will loosen its policy on share buybacks.

The move is thought by many Berkshire investors to be much needed, as the company is under pressure to put its big cash pile to work. And that cash pile stood at over $108 billion at the end of March 2018. 

Warren Buffett, the chairman, and Vice Chairman Charlie Munger, are now authorized to initiate share buybacks when they both deem the repurchase price "below Berkshire's intrinsic value." The previous policy said the share buyback purchase price can't exceed 1.2 times book value per share. As a result of Wednesday's stock pop, shares are currently trading around 1.42 times book value. 

And the move is likely a sign that the dynamic duo atop the giant conglomerate will indeed pursue buybacks soon.

"We think the amendment signals the company's interest in repurchasing its own shares," Morgan Stanley analyst Kai Pan wrote in a note to clients. Yet "Berkshire will not initiate any buybacks until it releases second-quarter earnings after market close on Friday, August 3," Pan said.

Possibly aiding Pan's case that Berkshire will soon repurchase stock is his belief Berkshire will deliver strong quarterly results. "We estimate strong second-quarter net income of $11.1b. aided by $5.5b after-tax gain in its equity investment portfolio," he said. 

Buybacks may be a good alternative to M&A for Berkshire's cash situation because "rising equity markets and PE funds' appetite make it a less ideal environment for acquisitions," Pan said. 

"We think the amendment allows Berkshire to return part of the excess capital to shareholders while maintaining financial flexibility if attractive acquisition opportunities arise," he concluded. 

Berkshire is up just 1.18% this year. 

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SEE ALSO: Morgan Stanley rises more than 3% after strong earnings beat

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