An Andy Warhol-like print of Berkshire Hathaway CEO Warren Buffett hangs outside a clothing rack during the first in-person annual meeting since 2019 at Berkshire Hathaway Inc in Omaha, Nebraska, United States on April 30, 2022.
Scott Morgan | Reuters
Warren Buffett defended share buybacks in Berkshire Hathaways annual letter, pushing back against those who oppose the practices he believes are beneficial to all shareholders.
“When you’re told that any buyback is bad for shareholders or for the country, or especially beneficial for CEOs, you’re listening to either a financial illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” said a 92-year-old investor the long-awaited letter released last Saturday.
The “Oracle of Omaha” initiated a buyback program in 2011 and has relied on buybacks in recent years amid a competitive business environment and an expensive stock market. The conglomerate spent a record $27 billion on buybacks in 2021 as Buffett found few opportunities externally.
Buyback activity slowed this year to about 8 billion dollars when the billionaire investor went on a buying spree with stocks being sold. Berkshire also took over Alleghany Insurance for $11.6 billion, Buffett’s biggest deal since 2016.
Stock buybacks have drawn criticism from politicians who believe Corporate America should use its money in other ways to boost long-term growth, such as employee benefits and capital spending. Many say buybacks often provide an incremental boost to earnings per share growth, and when companies stop doing it, it becomes more challenging to achieve that goal.
Buffett believes that buybacks are beneficial to shareholders because they provide a boost to the intrinsic value per share.
“The math isn’t complicated: As the share goes down, your interest in our many businesses increases. Every little bit helps if buybacks are made at value-enhancing prices,” Buffett said. “Profits from value-creating buybacks, it should be emphasized, benefit all owners – in every respect.”
The legendary investor highlighted Apple and American Express, two of his largest stock holdings that have similar strategies. Buffett has previously said he’s a fan of CEO Tim Cook’s stock buyback program, and how it gives the conglomerate increased ownership of every dollar of the iPhone maker’s earnings without the investor having to lift a finger.
“At Berkshire, we directly increased your interest in our unique collection of companies by repurchasing 1.2% of the company’s outstanding shares,” Buffett said.
The Inflation Reduction Act’s provision that imposes a 1% exercise tax on repurchases came into force this year.
Buffett’s widely read shareholder letter is released alongside Berkshire’s annual report and usually sets the tone for the conglomerate’s big annual meeting in May in Omaha, Nebraska, nicknamed the “Woodstock for Capitalists.”
The letter touched on a few other themes, including praise for its longtime partner, Charlie Munger, 99, as well as how Berkshire was happy to pay a large amount of tax because of the benefit it has received over the years from the “American tailwind.”
“I’ve been investing for 80 years — more than a third of our country’s lifetime,” Buffett said. “I have yet to see a time when it made sense to make a long-term bet against America. And I highly doubt that any reader of this letter will have a different experience in the future.”
The much-admired investor said Berkshire will always hold a boatload of cash and U.S. Treasuries along with a wide range of companies for the future. Its cash pile stood at nearly $130 billion by the end of 2022.
Buffett also revealed that Berkshire’s future CEOs will have a significant portion of their net worth in the conglomerate’s stock, bought with their own money. Greg Abel, Buffett’s likely successor and Berkshire’s vice chairman of non-insurance businesses, spent more than $68 million on Berkshire’s stock last year.
“At Berkshire, there will be no finish line,” Buffett said.