Share buybacks have always been a touchy subject. While some advise against it, some believe it increases shareholder value and elevates the company’s market standing. The Oracle of Omaha falls into the latter category as evidenced by his latest letter to Berkshire Hathaway stakeholders. In the letter, Warren Buffett, who has conducted several stock buybacks, recommends people reinvest their money into American companies.
The billionaire investor expressed his derision for those opposing share buybacks, calling them economic illiterates.
The Berkshire Hathaway CEO defended the practice of companies reinvesting in their own shares and said that it is one of the many ways of making money.
Share buybacks have historically been frowned upon by regulatory bodies and the US government levies a 1% tax on stock buybacks of publicly listed companies. However, if you are looking to increase your company’s net worth, taking advice from a self-made billionaire is not a bad idea.
Warren Buffett on Share Buybacks
In his no-holds-barred annual letter to Berkshire’s stakeholders, the billionaire called critics of share buybacks “economic illiterates or silver-tongued demagogues.” He stressed on the fact that buybacks benefit the shareholders of the company.
“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices,” he added.
Buffett gives examples of share buybacks by Apple and Amex and how they have benefitted the company. Just last year, Apple spent an eye-watering $90 billion on buybacks.
The investor’s participation in share buybacks of Coca-Cola and American Express have served Berkshire well.
Advantages of share buybacks
-Companies compensate shareholders through buybacks and reduce their capital.
-Stock buybacks also increase share prices as demand is greater and supply is less. It also returns money to the original shareholders in a tax-efficient manner.
– It reduces the number of outstanding shares in the market and helps the company buy back control.
Disadvantages of share buybacks
-Buybacks can give companies excess leverage and lead to lower resilience.
-The wrong intent. Sometimes, companies initiate buybacks to boost earnings per share (EPS) and tend to pay through the nose, which can affect long-term profitability.
– Capital that could have been invested in research and development is reduced. Critics assert that the money would have been better used for employee welfare, expansion plans, and more jobs amongst other things.
Share buyback Successes
To support his assertion that share buybacks are a win for investors, Warren Buffett quoted his experience with AmEx and Apple.
According to data compiled by Birinyi Associates, American firms announced a record $1.26 trillion of share buybacks in 2022, up 3% from a year ago. The steady buyback programs initiated by big companies served to keep the gloomy weather at bay at Wall Street throughout last year.
Birinyi’s data shows that about one-fifth of members in the S&P 500 reduced their share count by at least 4%.
In 2021, Berkshire spent almost $27 billion on buybacks. The billionaire CEO maintained that he is optimistic about the future of American companies, despite suffering losses to the tune of $18 billion between 2021 and 2022. The company is currently the largest owner in American Express, Bank of America, Chevron, Coca-Cola, HP Inc, Moody’s, Occidental Petroleum, and Paramount Global.
For the business magnate, share buybacks are a better way of returning capital than paying dividends. Standing by his beliefs, he wrote, “I have yet to see a time when it made sense to make a long-term bet against America.”
While this might be well and true for a seasoned investor like him, ultimately a company’s share buyback must be examined for intent with regards to long-term growth rather than short-term profits.
