Warren Buffett defends stock buybacks in annual letter

by Ana Lopez

With Warren Buffett annual letter to shareholdershe argued for the positive nature of share buybacks – at least if they are bought at reasonable prices.

“If you are told that all buybacks are detrimental to shareholders or the country, or particularly beneficial to CEOs, you are listening to an economically illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” Buffett wrote in the letter.

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As the New York Times‘ Agree notedthis was one of Buffett’s shortest letters in decades and comes amid what on paper looks like billion-dollar losses for his investment firm Berkshire Hathaway in the midst of a zigzagging stock market. (In the letter, Buffet says company fundamentals are still good, and he Also said the loss number is “misleading”.)

Buffett is the chairman of Berkshire Hathaway, a huge investment company that, as he outlines in the letter, has huge holdings in Apple, American Express and Coca-Cola, among others. In the letter, he also included a few sentences about a tool that large companies often use in the public market: share buybacks.

This comes after President Biden said in January’s annual State of the Union address that Congress should quadruple the 1% tax on buybacks instituted by the Inflation Reduction Act. In particular, he attacked energy companies for buying back and “rewarding their CEOs and shareholders,” he said.

Exxon, for example announced record profit in 2022 and increased a $30 billion plan to $50 billion in share buybacks over the next two years. Chevron announced a $75 billion share repurchase program in January.

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A stock buyback is when a company uses excess cash to buy back its own stock, often referred to as “reinvesting” in the company. It also reduces the number of shares outstanding, which benefits those who already own parts of the company. However, it also means that the company does not invest more tangibly in itself, for example by hiring more people or acquiring other companies, in addition to improving its financial position.

The Wall Street Journal pointed out that this action is often taken by very large companies because their companies have reached a point where they have more cash available than resources and opportunities to put money into new things.

Share buybacks are not limited to energy companies.

Apple has been a practitioner of buybacks for a long time. Bloomberg in November reported that Apple has spent more than $550 billion buying back its own stock since 2013, beating every other US company.

Senators Sherrod Brown (D-Ohio) and Ron Wyden (D-Oregon) have proposed higher taxes on repurchase and have called for the Department of Commerce to ensure funds from the semidocutor incentive CHIPS Act were not used for buybacks. But, as many have pointed out, a 1% tax is not enough to influence companies stop redemptions.

In Buffett’s letter, he said that as long as the shares were not bought at high prices, they were essentially neutral. He gave the example of a car dealership with three owners. One with a passive interest sells its share to the others at “a price that is attractive to the two remaining shareholders”.

“Has this transaction harmed anyone upon completion? Has the manager benefited in any way over the remaining passive owners? Has the public been hurt?” he wrote in the letter.

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