There are many critics of corporate stock buybacks, but Warren Buffett is certainly not one of them.
In his latest annual letter to shareholders, the Oracle of Omaha revealed that his holding company, Berkshire Hathaway (BRK-A, BRK-B), had spent nearly $25 billion repurchasing class A shares. Buffett said the action “demonstrated our enthusiasm for Berkshire’s spread” of vast holdings, which include major companies like Apple (AAPL), Bank of America (BAC), Coca-Cola (KO) and Merck (MRK).
“Berkshire has repurchased more shares since year end and is likely to further reduce its share count in the future,” Buffett said, leaning in on his affinity for the controversial practice.
The legendary billionaire investor was so effusive in his praise of buybacks that he referred to an old quote attributed to Mae West, the “sultry” 20th century actress: “Too much of a good thing can be…wonderful.”
According to Buffett’s logic, the buybacks were conducted to “enhance the intrinsic value per share for continuing shareholders and would leave Berkshire with more than ample funds for any opportunities or problems it might encounter.”
He blasted companies who repurchase stock “at simply any price,” calling that strategy “embarrassing” and just the opposite of what Berkshire likes to do.
He cited Apple’s stock — which he first purchased in late 2016 at a cost of $36 billion — as an example where his approach paid literal dividends. By July 2018, Berkshire held over a billion split-adjusted shares of the iPhone maker, or 5.2%, at a cost of $36 billion.
“Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also — in 2020 — pocketed an additional $11 billion by selling a small portion of our position,” he wrote.
“Despite that sale — voila! — Berkshire now owns 5.4% of Apple,” Buffett declared. And because Apple continually bought back its own stock, that’s increased the value of Berkshire’s holdings, and helped boost shareholder value.
“Because we also repurchased Berkshire shares during the 21⁄2 years, you now indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018,” the investor said.
“The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses,” he added.
With the COVID-19 pandemic as a backdrop, 2020 was a rough one for share repurchases, which is routinely singled out by politicians and even some on Wall Street. As a Democratic candidate, President Joe Biden called on companies to suspend the practice, a call which many heeded during a tumultuous year.
During the third quarter of 2020, corporate buybacks were $101.8 billion, according to data from S&P Global. That figure represented a 14.8% rebound from the second quarter, which was the worst year for stock repurchases since 2012.
However, 2021 has started off with a bang, as corporations snap up their own stock at a rapid pace. Analysts at Bank of America said that weekly buybacks last week were the largest since February 2020, led by technology companies, but still tracking 35% below the comparable year-ago period.
Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek
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