Valuation matters for buybacks 

If Berkshire should return more capital to shareholders either via a dividend or a more aggressive buyback program is always a hot topic of conversation, and Buffett addressed it again in this year’s letter. He is proud of that for the last two years Berkshire was “first among American businesses in the dollar volume of earnings retained” and that they hope these reinvested dollars will earn their keep. He clearly thinks Berkshire can still profitability deploy the capital it has coming in every year.

Buffett also reiterated that the only time he’ll buyback shares is when they’re trading below 120% of book value and that buying them back at higher prices would destroy value for remaining shareholders. He remains baffled that other companies don’t take valuation into consideration and suggested that before when discussing repurchases “a CEO and his or her Board should stand, join hands and in unison and declare, “What is smart at one price is stupid at another.”

Notably though, Buffet praises the repurchases at some of Berkshire’s equity holdings (calling out  Bank of America by name) writing “we very much like this behavior because we believe the repurchased shares have in most cases been underpriced.”

Who will replace Buffett?

There was no big news on the question of who will take over Berkshire after Buffett. He once again showered praise on Berkshire Hathaway Reinsurance Group’s Ajit Jain saying “If there were ever to be another Ajit and you could swap me for him, don’t hesitate. Make the trade!”. And showed his confidence in his investment managers Todd Combs and Ted Weschler as they now each independently manage $10 billion and Buffett generally only learns about their moves by “looking at monthly trade sheets.”

Hello Regulators

Berkshire owns several businesses that are highly regulated from BNSF railroads, to Berkshire Hathaway Energy to the mortgage lending at Clayton Homes.  And portions of the letter, as has been the case in the past, were clearly targeted to the regulatory audience. From extolling that their Iowa utility's “rock-bottom prices add up to real money for paycheck-strapped customers” to highlighting that “Clayton also has long had programs that help borrowers through difficulties”, Buffett is trying to send a message that Berkshire is a good corporate citizen.

However, there was no discussion of the scandals that plagued  Wells Fargo in 2016. Expect that to be one of the top questions at the meeting in May.