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Warren Buffett calls stock buyback critics ‘economic illiterate’ in Berkshire Hathaway annual letter

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An Andy Warhol-like print of Berkshire Hathaway CEO Warren Buffett hangs outside a clothing stand during the first in-person annual meeting since 2019 of Berkshire Hathaway Inc in Omaha, Nebraska, U.S. April 30, 2022.
Scott Morgan | Reuters

Warren Buffett defended stock buybacks in Berkshire Hathaway‘s annual letter, pushing back on those railing against the practice he believes to be beneficial to all shareholders.

“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),” the 92-year-old investor said in the much-anticipated letter released Saturday.

The “Oracle of Omaha” initiated a buyback program in 2011 and relied on repurchases in recent years during a competitive deal-making environment and an expensive stock market. The conglomerate spent a record $27 billion in buybacks in 2021 as Buffett found few opportunities externally.

Repurchase activities slowed down this year to about $8 billion as the billionaire investor went on a buying spree with stocks selling off. Berkshire also took over insurance company Alleghany for $11.6 billion, Buffett’s biggest deal since 2016. 

Stock buybacks have drawn criticism from politicians who believe Corporate America should use their cash in other ways to boost growth in the long term, such as employee benefits and capital expenditures. Many say buybacks often provide an incremental boost to earnings per share growth, and when companies stop doing that, accomplishing that goal becomes more challenging.

Buffett believes buybacks are beneficial to shareholders as they provide a lift to per-share intrinsic value.

“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,” Buffett said. “Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.”

The legendary investor highlighted Apple and American Express, two of his biggest equity holdings that have similar strategies. Buffett in the past has said he is a fan of CEO Tim Cook’s stock repurchase program, and how it gives the conglomerate increased ownership of each dollar of the iPhone maker’s earnings without the investor having to lift a finger.

“At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares,” Buffett said.

The Inflation Reduction Act provision imposing a 1% exercise tax on buybacks became effective this year. 

‘American tailwind’

Buffett’s widely read shareholder letter is released with Berkshire’s annual report and usually sets the tone before the conglomerate’s big annual meeting in May in Omaha, Nebraska, nicknamed “Woodstock for Capitalists.”

The letter touched on a few other themes, including praise for his longtime partner, Charlie Munger, 99, as well as how Berkshire was glad to pay a large amount of taxes because of the benefit it’s received over the years from the “American tailwind.”

“I have been investing for 80 years – more than one-third of our country’s lifetime,” Buffett said. “I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”

The much admired investor said Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses for the future. Its cash pile stood at nearly $130 billion at the end of 2022.

Buffett also revealed that Berkshire’s future CEOs will have a significant part of their net worth in the conglomerate’s shares, bought with their own money. Greg Abel, Buffett’s likely successor and Berkshire’s vice chairman of non-insurance businesses, spent more than $68 million on Berkshire’s shares last year.

“At Berkshire, there will be no finish line,” Buffett said.

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