Warren Buffett has again explained how share buyback can be used to not only benefit shareholders from the original transaction, but how to use it to leverage off the buybacks of other companies.
It’s a method from Berkshire Hathaway playbook that, if combined with buybacks in companies the company invests in can boost the grip long term shareholders in Berkshire have on it and on the likes of Apple.
It’s also a buyback system that exposes the lack of thinking behind the idea and the way it is used for a host of other companies every day and week. Buffett thinks that (straight capital management buybacks) can be a waste of time and valuable capital.
Buffett’s company bought back a record $US24.7 billion of its shares in 2020 – including $US9 billion in each of the third and 4th quarters. That was equal to 5.2% of Berkshire’s issued capital (both the A voters and the B non-voters).
That was almost five times the $US5 billion worth of shares bought back in all of 2019. The stock buybacks have continued in 2021, with Berkshire repurchasing more than $US4 billion of its own stock so far.
After spending that $24.7 billion and investing billions in the shares of five major Japanese trading houses, Verizon and Chevron (and selling $US11 billion worth of Apple shares to finance other purchases) Berkshire still ended 2020 with $US138.3 billion of cash.
So, absent a sudden mega deal (which he has been reluctant to do in recent years as the big investments in Kraft Heinz and Precision Castparts have gone bad and lost billions in value), more buybacks are on the cards – in fact Buffett said in his shareholder letter that they can be expected.
In his shareholder letter, Buffett explained that the buybacks last year increased the ownership stay put shareholders have in all of Berkshire’s businesses by 5.2% “without requiring you to so much as touch your wallet.”
“In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse.”
Buffett explained that the huge investment in Apple helps explain his thinking.
“Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple.”
“Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position.
Despite that sale – voila! – Berkshire now owns 5.4% of Apple (worth $US120 billion at the end of 2020). “That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding,” Buffett pointed out.
“But that’s far from all of the good news. Because we also repurchased Berkshire shares during the 21⁄2 years, you now indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018.
“This agreeable dynamic continues. Berkshire has repurchased more shares since yearend and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well.
“As these reductions occur, Berkshire shareholders will not only own a greater interest in our insurance group and in BNSF and BHE, but will also find their indirect ownership of Apple increasing as well.
“The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses,” Buffett explained.
So last year Berkshire not only bought back its shares, but sold Apple shares to raise cash or other investments, or to finance some of its own buybacks.
Now with Bank of America doing buybacks at the moment ($US2.9 billion this quarter) the logic behind the Berkshire by backs will be further reinforced. Perhaps that explains some of the $US4 billion in buybacks already in this quarter.
