22 Apr

Analyzing Warren Buffett’s Views on Share Buybacks

WRITTEN BY Mohit Oberoi, CFA

Share buybacks

Berkshire Hathaway (BRK-B) chair Warren Buffett hasn’t been a big fan of share buybacks. Buffett prefers companies that invest cash in their operations. Historically, Berkshire also hasn’t been a big repurchaser of its own stock.

Last year, Berkshire changed its share repurchase policy. Previously, its buybacks had been linked to book value. However, last year, the company relaxed its buyback policy, making it more subjective and essentially giving Buffett and vice chair Charlie Munger more leeway. While the company’s share buybacks have received criticism from some, Buffett has defended them in an interview with Yahoo Finance, saying they make “nothing but sense.”

Analyzing Warren Buffett’s Views on Share Buybacks

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Apple

At last year’s shareholder meeting, Buffett supported Apple (AAPL) buybacks. In the meeting, Buffett also admitted to missing out on Alphabet (GOOG) and Amazon (AMZN) and revealed why he hadn’t invested in Microsoft (MSFT). In his 2018 shareholder letter, Buffett also talked about buybacks.

According to Buffett, Berkshire’s repurchases would “take place at prices above book value but below our estimate of intrinsic value. The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down.” Read Warren Buffett and the Problem with Elephants for a detailed analysis of Buffett’s 2018 letter.

Share buybacks have been running at record levels. Amid economic uncertainty, US companies (SPY) have preferred to return cash to shareholders rather than to invest in their businesses. Negative business sentiments have taken a toll amid slowing growth and the US-China trade dispute. However, as the United States and China move toward a trade deal and economic slowdown concerns subside, we would see some uptick in businesses’ capex plans.

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