There are many critics of corporate stock repurchases, but Warren Buffett is certainly not one of them.
In its last annual letter to shareholders, Oracle of Omaha revealed that its holding company, Berkshire Hathaway (BRK-A, BRK-B), spent nearly $ 25 billion repurchasing class A shares. Buffett said the stock “demonstrated our enthusiasm for the expansion of Berkshire ”of vast holdings, which include large companies such as Apple (AAPL), Bank of America (BAC), Coca-Cola (KO) and Merck (MRK).
“Berkshire has bought back more shares since the end of the year and is likely to further reduce its share count in the future,” said Buffett, building on his affinity for the controversial practice.
The legendary billionaire investor was so effusive in his praise for the buybacks that he referred to an old quote attributed to Mae West, the “sensual” actress of the 20th century: “Too good things can be … wonderful.”
According to Buffett’s logic, repurchases were conducted to “increase the intrinsic value per share for permanent shareholders and would leave Berkshire with more than ample funds for any opportunities or problems it might encounter”.
He criticized companies that buy back shares “at any price”, calling this strategy “embarrassing” and the exact opposite of what Berkshire likes to do.
He cited Apple’s shares – which he bought for the first time in late 2016 at a cost of $ 36 billion – as an example of where his approach paid literal dividends. In July 2018, Berkshire held more than a billion shares adjusted by the iPhone maker’s split, or 5.2%, at a cost of $ 36 billion.
“Since then, we have received regular dividends, on average about $ 775 million annually, and also – in 2020 – we have pocketed an additional $ 11 billion by selling a small part of our position,” he wrote.
“Despite the sale – voila! – Berkshire now owns 5.4% of Apple, ”said Buffett. And because Apple continually bought back its own shares, this increased the value of Berkshire’s shares and helped to increase shareholder value.
“As we also repurchased Berkshire shares for the 21⁄2 years, you now indirectly own 10% more of Apple’s future assets and earnings than in July 2018,” said the investor.
“The mathematics of repurchases slowly decreases, but it can be powerful over time. The process offers a simple way for investors to have an increasing share of exceptional business, ”he added.
With the COVID-19 pandemic in the background, 2020 was difficult for share buybacks, which is routinely pointed out by politicians and even some on Wall Street. As a Democratic candidate, President Joe Biden urged companies to suspend the practice, an appeal that many responded to during a tumultuous year.
During the third quarter of 2020, corporate repurchases were $ 101.8 billion, according to data from S&P Global. This number represented a recovery of 14.8% in relation to the second quarter, which was the worst year for share buybacks since 2012.
However, 2021 started with a bang, with companies snapping up their own stocks at a rapid pace. Bank of America analysts said the weekly repurchases last week were the largest since February 2020, led by technology companies, but still 35% below the comparable period of the previous year.
Javier David is an editor at Yahoo Finance. Follow Javier on Twitter: @TeflonGeek
Read the latest financial and business news from Yahoo Finance
Follow Yahoo Finance on Twitter, the Facebook, Instagram, Flipboard, SmartNews, LinkedIn, You Tube, and reddit.