Mar 6, 2023
Companies have been spending billions of dollars on buybacks and not everyone is a fan. But if you are against all buybacks, legendary investor Warren Buffett wants to give you a wake-up call.
“When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” Buffett says in his company Berkshire Hathaway’s latest annual letter to shareholders.
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He explains what actually happens to investors when Berkshire buys back its own shares.
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“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices.”
Opponents of stock buybacks include current U.S. President Joe Biden.
During his State of the Union address last month, Biden called big oil companies’ profits ‘outrageous’ and slammed their buybacks.
“They invested too little of that profit to increase domestic production and keep gas prices down. Instead, they used those record profits to buy back their own stock, rewarding their CEOs and shareholders,” Biden said, proposing to quadruple the tax on corporate stock buybacks.
Whether you like share repurchases or not, they serve as a means for companies to return cash to investors. Here’s a look at three major holdings in Buffett’s portfolio that are particularly generous with buybacks.
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Apple
Apple (AAPL) is Buffett’s largest publicly traded holding, representing around 40% of Berkshire’s portfolio by market value.
In the latest earnings conference call, management revealed that the company’s active installed base has surpassed two billion devices.
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While competitors offer cheaper devices, millions of users don’t want to live outside of the Apple ecosystem. The ecosystem acts as an economic moat, allowing the company to earn oversized profits.
The company is returning some of that profits to shareholders through buybacks. In the quarter ended Dec. 31, 2022, Apple spent $19.48 billion on share repurchases.
Given the amount of cash that the tech gorilla has, more buybacks could be on the way. At the end of December, Apple’s cash, cash equivalents, and marketable securities totaled $165.45 billion.
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American Express
American Express (AXP) is the fourth-largest holding at Berkshire Hathaway. Owning 151.6 million shares of AXP, Berkshire’s stake is worth around $26.3 billion.
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The company stands to benefit in an inflationary environment.
American Express makes most of its money through discount fees — merchants are charged a percentage of every Amex card transaction. As the price of goods and services increases, the company gets to take a cut of larger bills.
In Q4 of 2022, the company repurchased 4 million of its common shares, reducing the number of shares outstanding from 747 million to 743 million.
Buffett highlighted what American Express and Apple have been doing in the shareholder letter.
“At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us.”
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Chevron
Chevron (CVX) is one of the big oil companies that gushed huge profits last year.
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The company reported earnings of $35.5 billion for 2022, which represented a 127% increase from 2021. Sales and other operating revenues totaled $235.7 billion for 2022, up 51% year over year.
In January, Chevron’s board approved a 6% increase to the quarterly dividend rate to $1.51 per share. The board also approved a new $75 billion stock buyback program.
In 2022, Chevron repurchased nearly 70 million shares for $11.25 billion.
President Biden may not like these numbers, but Buffett probably won’t mind.
According to an SEC filing, Berkshire owned $29.3 billion of the energy giant at the end of December, making it the third-largest public holding of the company.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
