Sunday, February 26, 2023

Warren Buffet On Stock Buybacks: He Likes Them (BRK; AAPL; AXP)

As well he should.

"When you are told that all repurchases are harmful to shareholders or to the country, or
particularly beneficial to CEOs, you are listening to either an economic illiterate or a
silver-tongued demagogue (characters that are not mutually exclusive)."

—Warren E. Buffet, Letter to the Shareholders of Berkshire Hathaway

Here's the section of his 2022 letter to shareholders, published to the internet February 25, 2023:

....A very minor gain in per-share intrinsic value took place in 2022 through Berkshire share repurchases as well as similar moves at Apple and American Express, both significant investees of ours. At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares. At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us.

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. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.

Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect. Imagine, if you will, three fully-informed shareholders of a local auto dealership, one of whom manages the business. Imagine, further, that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt?

When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)....

That's on page 5 of the 10 page PDF, emphasis in the original.

I'm guessing that Mr. Buffet is responding to both the new 1% tax on corporate buybacks and the 7.5% corporate alternative minimum tax on unrealized capital gains.

Behind Mr. Buffet's "Aw shucks" folksy demeanor is a riverboat gambler who also has an  absolute lust for tax efficiency/deferral, along with any tax credits he can scoop up: for a few different reasons Berkshire Hathaway Energy runs a huge fleet of wind and solar electricity generation and the tax incentives are a big part of the calculation.

If interested here is the two-page Feb. 25 earnings release via BusinessWire, a Berkshire Hathaway company.