There are many critics of corporate stock repurchases, but Warren Buffett is certainly not one of them.
In its latest annual letter to shareholders, the Oracle of Omaha reveals that its holding company, Berkshire Hathaway (BRK-A, BRK-B), has spent nearly $ 25 billion repurchasing Class A shares. Buffett said the action shows ‘our enthusiasm for the distribution of Berkshire’ from large companies, which include large companies such as Apple (AAPL), Bank of America (BAC), Coca-Cola (CO) and Merck (HRC).
“Berkshire has repurchased more shares since the end of the year and is likely to further reduce the stock in the future,” Buffett said, relying on his adherence to the controversial practice.
The legendary billionaire investor was so exuberant in his praise of repurchase 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 made to ‘increase the intrinsic value per share for continuing shareholders, and would leave Berkshire with more than enough funds for any opportunities or problems it might encounter.’
He exploded companies buying back shares ‘at any cost’, calling the strategy ’embarrassing’ and just the opposite of what Berkshire would like to do.
He cites Apple’s share – which he only bought in late 2016 for $ 36 billion – as an example where his approach yields literal dividends. By July 2018, Berkshire had more than a billion split custom shares of the iPhone maker, or 5.2%, at $ 36 billion.
“Since then, we have both enjoyed regular dividends, averaging about $ 775 million a year, and we have also – in 2020 – pocketed another $ 11 billion by selling a small portion of our position,” he wrote.
“Despite that sale – voila! “Berkshire now owns 5.4% of Apple,” Buffett said. And because Apple was constantly repurchasing its own stock, it increased the value of Berkshire’s shares and increased the value of shareholders.
“Because we also repurchased Berkshire shares over the 21⁄2 years, you now indirectly own a full 10% more of Apple’s assets and future earnings than in July 2018,” the investor said.
‘The math of repurchase grinds away slowly, but can be powerful over time. The process provides a simple way for investors to own an ever-increasing share of extraordinary businesses, ”he added.
With the COVID-19 pandemic as a backdrop, 2020 was a difficult period for stock repurchases, frequently singled out by politicians and even some on Wall Street. As a Democratic candidate, President Joe Biden has called on companies to suspend the practice, a call that many have heeded during a turbulent year.
During the third quarter of 2020, corporate buybacks were $ 101.8 billion, according to data from S&P Global. The figure represented a rebound of 14.8% in the second quarter, the worst year for share buybacks since 2012.
However, 2021 started with a bang as companies quickly built up their own shares. Bank of America analysts said the weekly buyback last week was the largest since February 2020, led by technology companies, but that it was still 35% lower than the previous year.
Javier David is an editor of Yahoo Finance. Follow Javier on Twitter: @TeflonGeek
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