There are many criticisms of company stock repurchases, but Warren Buffett is certainly not one of them.
Omaha Oracle revealed in its latest annual letter to shareholders that his holding company Berkshire Hathaway (BRK-A, BRK-B) has spent nearly $25 billion to repurchase Class A shares. Buffett said this move “demonstrates our enthusiasm for Berkshire spread,” which includes large companies such as Apple (AAPL), Bank of America (BAC), Coca-Cola (KO) and Merck (MRK).
Buffett said: “Berkshire has repurchased more shares since the end of the year, and may further reduce its number of shares in the future.”
The legendary billionaire investor praised the stock buyback so much that he quoted an old saying from the 20th century “sultry” actress Mae West: “Too many beautiful things… …Maybe really great.”
According to Buffett’s logic, the purpose of the repurchase is to “increase the intrinsic value per share of continuing shareholders and enable Berkshire to have sufficient funds to deal with any opportunities or problems it may encounter.
He criticized companies that bought back shares “almost at all costs”, calling this strategy “embarrassing” and contrary to Berkshire Hathaway’s approach.
He cited Apple’s stock (which he purchased for the first time at a price of $36 billion at the end of 2016) as an example to illustrate his approach to pay a literal dividend. As of July 2018, Berkshire Hathaway held more than 1 billion shares of the iPhone maker’s spin-off adjusted shares, accounting for 5.2%, at a cost of $36 billion.
He wrote: “Since then, both of us have enjoyed regular dividends every year, averaging about $775 million per year, and by 2020, we will be able to make an additional $11 billion by selling a small portion of our position.”
“Despite this deal, voila!” Berkshire now owns 5.4% of Apple. “Buffett announced. And because Apple continues to repurchase its own stock, this increases the value of Berkshire Hathaway’s stock and helps increase shareholder value.
The investor said: “Because we have also repurchased Berkshire stock in 21⁄2 years, you now indirectly own 10% more Apple assets and future earnings than in July 2018,”
“The mathematical method of buybacks is slowly evolving, but over time it will become stronger. This process provides investors with a simple way for them to have an ever-expanding special part of their business,” he Added.
Against the background of the COVID-19 pandemic, 2020 is a difficult period for stock repurchases, usually by politicians and even Wall Street people. As a Democratic candidate, President Joe Biden called on the company to suspend this practice, and many people have heeded this call during a turbulent year.
According to data from S&P Global, in the third quarter of 2020, the company’s total repurchases were US$101.8 billion. This figure rebounded 14.8% from the second quarter, which was the worst stock repurchase year since 2012.
However, as the company quickly buys its own stock, 2021 will begin to vigorously. Bank of America analysts said that last week’s weekly repurchase was the largest since February 2020. It was dominated by technology companies, but it was still 35% lower than the same period last year.
Javier David is the editor of Yahoo Finance. Follow Javier on Twitter: @TeflonGeek
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