Buffett touts benefits of buybacks in his shareholder letter
Critics of stock buybacks are “either an economic illiterate or a silver-tongued demagogue” or both, he said
Billionaire Warren Buffett said critics of stock buybacks are “either an economic illiterate or a silver-tongued demagogue” or both and all investors benefit from them as long as they are made at the right prices. Buffett used part of his annual letter to Berkshire Hathaway shareholders Saturday to tout the benefits of repurchases that fiery Wall Street critics like Sens. Elizabeth Warren and Bernie Sanders and many other Democrats love to criticize. The federal government even added a 1% tax on buybacks this year after they ballooned to roughly $1 trillion in 2022.
“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”, Buffett explained.
“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”, he added.
“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?”, he continues.
“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),” wrote Buffett, who himself is a long-time Democrat.
Buffett said Berkshire’s remarkable record of doubling the returns of the S&P 500 over the last 58 years with him at the helm is the result of only “about a dozen truly good decisions – that would be about one every five years.”
He recounted a few of those (Coca-Cola, American Express...) in his letter, but kept his message — which has long been one of the best-read documents in the business world — remarkably brief this year at a little over eight pages. And he devoted an entire page to a tribute to his 99-year-old partner Charlie Munger.
“I think investors -- whether they be investors in Berkshire or just students of Berkshire -- look to him for more and I think they may come away wanting more,” CFRA Research analyst Cathy Seifert said.
Buffett pointed out how much Berkshire benefits from dividends that it receives from the huge investments in its portfolio like Coca-Cola and American Express even though he refuses to pay a dividend at the Omaha, Nebraska-based conglomerate he leads because he believes he can generate a bigger return for shareholders by investing that cash. Coke paid Berkshire $704 million in dividends last year and American Express added $302 million, and those payments helped push the value of those stakes to $25 billion for Coke and $22 billion for American Express. Berkshire paid $1.3 billion for each of those investments in the 1990s.
Buffett said the key lesson for investors is that “it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.”
Berkshire said its’ fourth-quarter profit fell sharply to $18.2 billion from $39.6 billion a year earlier as the paper value of its investments fell.
So those bottom line numbers were again distorted by the value of Berkshire’s sizeable stock portfolio. That’s why Buffett maintains that operating earnings are a better measure of Berkshire’s performance because they exclude derivatives and investments. But by that measure, Berkshire’s operating earnings also declined to $6.7 billion, or $4,584.46 per Class A share, from the previous year’s $7.3 billion, or $4,904.23 per Class A share.
That’s well below what Wall Street predicted. The three analysts surveyed by FactSet predicted Berkshire would report operating earnings per Class A share of $5,305.83 on average.
Analysts said that overall the results were still strong, but higher claims costs continued to hurt Geico’s results while railroad traffic slowed at BNSF and rising interest rates hurt several of Berkshire’s businesses that are tied to the housing market, like its nationwide network of Realtors and its Clayton Homes manufacturing housing unit.
Berkshire’s performance tends to follow whatever the U.S. economy is doing because so many of its dozens of manufacturing, utility and retail businesses follow those trends. In many ways, the conglomerate is a barometer of the economy.
Whenever Buffett sees opportunities, Berkshire continues to invest in whole companies and stocks. He was particularly aggressive last year when he made a net investment of roughly $53 billion by the calculations of Edward Jones analyst Jim Shanahan. Much of that went into stock of oil producers Occidental Petroleum and Chevron and last fall’s $11.6 billion acquisition of Alleghany Corp. insurance.
But even with all that spending, Berkshire’s cash hoard grew to $128.6 billion at the end of the year, up from $109 billion at the end of the third quarter. Berkshire’s businesses generate so much cash that it piles up quicker than Buffett can invest it.
At the start of this year, Berkshire boosted its stake in the Pilot Flying J network of 750 truck stops to 80%, up from the 38.6% it acquired in 2017, so that will help this year’s earnings.
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