Goldman Sachs Group Inc. will likely repay the $5 billion investment from Warren Buffett’s Berkshire Hathaway Inc. and may buy back as many as 10 percent of its outstanding shares over the next two years, according to Glenn Schorr, an analyst at Nomura Holdings Inc.
Repurchasing the preferred shares from Berkshire would increase annual earnings per share at the New York-based firm by about 85 cents, Schorr said today in a note to investors. A 5 percent reduction in shares outstanding would add about $1 a share to earnings, he wrote.
Goldman Sachs is awaiting results of a stress test that the Federal Reserve is using to determine whether the largest U.S. banks can begin returning capital to shareholders through dividends and share repurchases. The firm has an estimated Tier 1 common ratio of about 8 percent under the so-called Basel III capital rules, Schorr wrote.
“We think Goldman will be part of the small group of U.S. banks allowed to return capital at the end of 1Q11 and we believe the firm is clearly able to effectively manage its capital base given its strong starting point,” Schorr wrote. “Goldman’s shares outstanding could be reduced by 10 percent over the next two years (and we may be on the conservative side).” That would boost earnings per share and returns on equity, he wrote.
Goldman Sachs is likely to invest in its emerging markets businesses and technology improvements before returning capital to shareholders, Schorr wrote.
Capital Impact
The repayment could reduce the firm’s tier 1 common equity ratio by about 0.4 percentage points and reduce book value by about $3 a share, Schorr wrote. Those effects would likely be offset by the first-quarter earnings, he wrote.
David Wells, a Goldman Sachs spokesman, declined to comment. The bank is considering repaying the Berkshire investment, needing approval from the Federal Reserve to do so, a person familiar with the plans said in October.
Goldman Sachs turned to Buffett, the second-richest American and a cult figure in the investing world, to shore up the investment bank’s capital and restore market confidence after its stock tumbled and borrowing costs spiked following the Sept. 15, 2008, collapse of Lehman Brothers Holdings Inc. News of Berkshire’s investment also helped Goldman Sachs raise $5.75 billion from a stock offering a day later.
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