• Buffett isn’t a fan of stock buybacks — with exceptions
• Record buybacks among S&P 500 companies
• Berkshire Hathaway shareholders recognize “buffet put”
Warren Buffett uses the buyback of shares in his own company as an adequate means of finding a way out of the prevailing investment crisis. In this way, the star investor can use share buybacks to reduce his cash cushion somewhat, even though there are no attractive investments to be found on the market. For this purpose, the holding company of the US star investor even relaxed the former buyback limits, which stipulated that the purchases may only take place if the price of the share does not exceed the intrinsic book value by more than 20 percent.
“A clear signal”
Many Berkshire Hathaway shareholders are welcoming such easing, as they have utmost confidence in the perceptions of Warren Buffett and his vice president, Charlie Munger. “It’s a clear signal, because no shareholder knows the intrinsic value of the company better than Buffett and Munger themselves,” said Henrik Muhle, fund advisor to the Acatis Gané Value Event fund.
Money isn’t the issue
However, unlike some hedge fund managers, Buffett has no problem arranging money for new investments to finance new investments or share buybacks. The profit of the Berkshire group with all its subsidiaries amounted to 276 billion US dollars in 2021. More than 100 billion US dollars have already accumulated in the coffers of the holding company.
Buffett’s buyback philosophy
“The shareholder who chooses to sell today will of course benefit from any buyer, regardless of origin or motives. However, the existing shareholder will be penalized by buybacks above intrinsic value. Buying a dollar for $1.10 is not good business for those who stick with it,” Buffett said in 2000 in reference to a required stock buyback program.
US share buybacks at record levels
If a profitable public company has additional cash, it can make sense to buy back its own stock. For the full year 2021, repurchases by S&P 500 companies totaled $881.7 billion, a new annual record, S&P Global said in a report. The trend has continued so far in 2022, as the experts explained. However, it is unclear how demand for buyback programs will change with the new 1% tax on share buybacks announced by US President Joe Biden in August as part of the Anti-Inflation Act, which is to come into effect in 2023.
Buffett is actually not a fan of buyback programs
However, Buffett has sharply criticized this buyback practice by US companies. Because, according to the star investor, such buyback programs do not always offer the greatest added value for the owners. Buffett often finds the way US corporations buy back their own stock foolish. Because the rigid rules for buyback programs, which prevail at some corporations, often force managers to buy back a certain number of shares per month. However, if you take back your shares at any price and are not looking for favorable conditions, you run the risk of increasing your block of shares too expensively.
In order to prevent such expensive mistakes, the star investor from Omaha takes a completely different approach. Buffett stipulates in advance that possible buybacks may only be carried out up to certain price levels. To set this cap, Buffett uses the book value of his holding company as a guide. Accordingly, shares are only bought back if the valuation speaks for an investment. This approach offers the greatest possible value to Berkshire Hathaway shareholders.
A significant tax benefit
For Berkshire Hathaway shareholders, such a share buyback could not only be worthwhile from a price cosmetic perspective, but also from a tax perspective. While capital gains tax is due on a dividend distribution, a share buyback can be collected tax-free.
The “Buffett Put”
Many Berkshire Hathaway shareholders see a very special hedge in the star investor’s share buyback strategy, the so-called “Buffett Put.” They assume that Buffett would never let the stock fall below a certain level because he would first stabilize the stock with buybacks. However, the star investor himself would almost certainly not agree with this thesis.
Berkshire buyback recedes
Recently, however, the star investor has moved away from its buyback strategy: While Buffett put almost $6.9 billion in share buybacks in the fourth quarter of 2021, it was only around $3.2 billion in the first quarter of 2022. In the second quarter of the year, the Oracle of Omaha invested just over a billion US dollars in Berkshire stocks. According to Business Insider, however, this is related to the fact that the Berkshire Hathaway boss went bargain-hunting in the first quarter and left more than $51 billion in the stock market – the most in a long time. According to the portal, such investment packages should not become the norm, so Buffett could soon turn to his buyback program again. The price of Berkshire Hathaway stocks has also recently been under pressure, which could allow the stock market legend to hold cheap buyback positions in the future.
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