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on buybacks"

"Buffett on stock buybacks:
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)."

Savage

Someone call Bernie Sanders and Elizabeth Warren please.

Buffett on stock buybacks:
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)."

Savage

Someone call Bernie Sanders and Elizabeth Warren please.




Hell, call any random person their party, for that matter. Nice to hear Buffett's inner Munger, once in a while, and it's always nice to hear honest people criticize the craziness in their own political circle (works for both sides, of course.)

Fortunately, 1% is not enough to stop the buybacks from resuming:

https://twitter.com/wabuffo/status/162947167948634...

Some wonderful stuff on how repurchases made at high prices destroy capital from both Buffett & Bloomstran...

Buffett on stock buybacks:

"Just as surely, when a company overpays for repurchases, the continuing shareholders lose.
At such times, gains flow only to the selling shareholders and to the friendly, but expensive,
investment banker who recommended the foolish purchases."

Blomstran on buybacks:

"As for the S&P500, after about a third of profits are sent to index shareholders as dividends,
more than 100% of the retained balance is used repurchasing shares to merely offset the dilution
that results from giving 2% of the average company to insiders each year as options and restricted shares.
Share reduction of the index companies was a modest 0.7% per annum for the past decade. Said differently,
companies spent roughly 60% of profits to purchase 2.7% of their market capitalization each year,
yet only reduced the share count by 0.7% annually. Bully. Retained earnings are NOT reinvested at the return on equity.
All retained earnings are spent repurchasing expensive shares. Repurchases made at high prices destroy capital."

Good morning genius, let's hope apple isn't buying back, at high prices. It would be interesting to hear Chris or Buffett drill down on how much apples buybacks, have reduced the issued and outstanding share count. Apparently apples stock based comp doesn't bother them, yet?

Berkshire paid $8.2 Billion cash on 1/31/2023 for the additional 41.4% of Pilot . The original 38.6% interest was carried at $3.2 Billion on Berkshire's books and will be subject to a remeasurement gain in Q1 2023.

Valuation of 100% of Pilot based on the original 38.6% carrying value of $3.2 Billion is $8.29 Billion

Valuation of 100% of Pilot based on the Jan. 2023 deal is $19.81 Billion.

Berkshire's 80% would make Pilot a $15.85 Billion subsidiary.

One interesting bit from the 10-K is what they are doing with Alleghany Capital (the non-insurance businesses acquired with Alleghany). The larger companies, like W&W/AFCO Steel [builder of the MSGE Sphere in Las Vegas] are operated independently as part of the Manufacturing, Service and Retail group - I assume reporting to Greg Abel. The smaller manufacturing companies acquired with Alleghany "primarily became part of Marmon." - page K-48

From page K-58 of the 10-K, on the effect of the 'alternative minimum tax on book profits' on Berkshire:


On August 16, 2022, the Inflation Reduction Act of 2022 ('the 2022 act') was signed into law. The 2022 act contains numerous provisions, including a 15% corporate alternative minimum income tax on 'adjusted financial statement income', expanded tax credits for clean energy incentives and a 1% excise tax on corporate stock repurchases. The provisions of the 2022 act become effective for tax years beginning after December 31, 2022. On December 27, 2022, the IRS and Department of Treasury issued initial guidance for taxpayers subject to the corporate alternative minimum tax. The guidance addresses several, but not all, issues that needed clarification. The IRS and Department of Treasury intend to release additional guidance in the future. We will continue to evaluate the impact of the Act as more guidance becomes available. We currently do not expect a material impact on our consolidated financial statements.

This is a great point. I think Buffett makes goes further into an area he does not usually opine on - macro economics.

From page 8, second to last paragraph, last two sentences: "Berkshire also offers some modest protection from runaway inflation, but this attribute is far from perfect. Huge and entrenched fiscal deficits have consequences."

I interpret this as Buffett is saying inflation is a consequence of huge fiscal deficits. Would love to hear others thoughts on this.

Sam

I would've preferred a less acerbic response. All the tongue lashing does is give the "demagogues" a chance to clap back (which surely they will do) at the bad instances of buybacks like buying back with corporate tax cuts instead of reinvesting and buying back at overvalued levels. Then it just becomes a shouting match in an echo chamber and whoever bellows loudest has the better chance to win, which in this case is the demagogues! Just point out our side of the story and the inherent flaws in their argument which is all we can really do to try and stop them.

Perhaps so on a less acerbic response.

I'm sure it gets old when politicians from all sides vilify the wealthy when in Warren's case the vast majority of his wealth goes to society.

"As for the S&P500, after about a third of profits are sent to index shareholders as dividends, more than 100% of the retained balance is used repurchasing shares ...
Share reduction of the index companies was a modest 0.7% per annum for the past decade. Said differently, companies spent roughly 60% of profits to purchase 2.7% of their market capitalization each year, yet only reduced the share count by 0.7% annually.

Is this right? Over what timeframe?

I knew buybacks offset issuance to some extent, but this is saying that divis are only 33-40% of profits, and all of the rest goes to buybacks (not investment??) and only ~25% of that represents share count reduction. So shareholders are only getting say 36%+16% = 52% of profits? Is it really this bad in the long term? It doesn't seem possible for US companies / markets to do so well if this is the case.
What am I missing?

SA

"As for the S&P500, after about a third of profits are sent to index shareholders as dividends, more than 100% of the retained balance is used repurchasing shares ... Share reduction of the index companies was a modest 0.7% per annum for the past decade. Said differently, companies spent roughly 60% of profits to purchase 2.7% of their market capitalization each year, yet only reduced the share count by 0.7% annually.

SteadyAim:
Is this right? Over what timeframe? I knew buybacks offset issuance to some extent, but this is saying that divis are only 33-40% of profits, and all of the rest goes to buybacks (not investment??) and only ~25% of that represents share count reduction. So shareholders are only getting say 36%+16% = 52% of profits? Is it really this bad in the long term? It doesn't seem possible for US companies / markets to do so well if this is the case.
What am I missing?

I want to congratulate SteadyAim firstly for publishing the 1,000th post above! Secondly, I congratulate for the post containing many questions, which is the core spirit of Shrewd'm. It doesn't rhyme so well, but rather than curiosity killed the cat, it should really be curiosity allowed the cat to kill.

No-one responded to your excellent questions. The main thing is to think of value given to shareholders in two main components; (1) the dividends paid out (2) plus the inherent increase in underlying value of the firm itself. Buying back stock - in itself - doesn't increase the value of the firm, and often decreases it. Buybacks are economicaly just like any other stock purchase; whether purchasing your own firm or someone else's firm, the value only increases if you get more than $1 worth for each $1 spent. Similarly, buybacks are not "returning value to shareholders" as constantly quoted and almost perceived as a fact. If Microsoft buys some stock of Google, it isn't "returning value to shareholders" just like if Microsoft buys stock of Microsoft it also isn't "returning value to shareholders". Unless buying at a bargain (or - technical note - if promising, in a moment of insanity, that the cash would otherwise be held forever and never used in any other way other than buybacks. Companies never make the later insane promise of course, and buybacks merely eliminate the future more intelligent use of the cash).

In fact, sometimes buying other firms, rather than your own firm, is a much smarter idea. Sanborn Maps is a very good example of this. In the 1930s their mapping business was dwindling, and instead of buying stock of Sanborn as would be popular today, they kept buying none of their stock and instead built an investment portfolio of outside stocks - which eventually greatly exceeded their mapping business - which Buffett could smell, and the smell was like flowers, and he quickly became excited.

The main answer to "It doesn't seem possible for US companies / markets to do so well if this is the case. What am I missing?" is capital investment. Our businesses spend our cash on stuff that shows up on the balance sheet, and (if purchased well) the additional purchases produce extra earnings. This "new stuff" (from capital expenditure) includes capital expenditure to expand current operations, and the purchase of other businesses. So value "obtained by shareholders" (a term I'm inventing on the spot, as it is exceedingly more useful than value "returned to shareholders") is the sum of dividends paid out and the "new stuff" purchased.

How much does this "new stuff" increase the value of the average, though? The answer is not as much as most would hope. After inflation, stock prices only rose 2-3% or so over the last century (if you average the starting price over a few decades, given that in 1923 stocks were exceptionally cheap), and the actual real value increase was generally closer to the 1-2%, as 1% of the stock price increase is just from the increase in valuation. We pay about double now what we used most of the last century (the CAPE ratio is about 28 now, versus fluctuating wildly around a central value of about 14 over the last century). So, with the "extra stuff" providing us only 1-2%, and dividend yield usually around 3-4%, it is the dividends paid out that account for most of the value provided to shareholders.

(NB: The dividend yield of the S&P500 today is 1.6% but if stocks were half their current value, the yield would be 3.2%. It is well known that dividend yields are lower today than a century ago, but that isn't only because payout ratios are much lower; it is also just a result of stock prices being higher now. Investing from any random starting point in the last 100 years was usually more fun than having to start from today. With the dividend yield so much higher, you were usually likely to have a better return than starting from today.)

It is true that buybacks (which decreases the share count) these days are largely negated by employee stock compensation (which increases the share count), but it doesn't matter in itself. Remember the buybacks are no different to the company having an internal stock portfolio and just buying the stock of its own firm (so it isn't "returning value"). Stock based compensation is accounted for today by reducing the reported earnings accordingly, and the stock based compensation is also recognised as a non-cash expense on the income statement and added back on the cash flow statement. When CFOs state "We are buying stock to negate for stock compensation" they are misunderstanding the economics. The stock is diluted, which is one thing and, but the decision to buy stock is a completely independent decision that should only be an equation of the immediate economic value received (hopefully more than $1, though this isn't usually the case) for each $1 spent.

- Manlobbi

Hi Manlobbi,

Thanks for that lengthy reply (I'd forgotten about my post), and these boards! It's often fun to see what just 1 programmer (or a v small team) can achieve* given the right tools and incentive, excellent work! :-)

So if I followed that correctly, and we assume (haha, ass-u-me etc) similar in the future, and no change in valuation (haha again), we might expect something like inflation + divis + 1-2% ? So call it 3% real, +/-. Yeah, I can believe that. In fact that's what I would expect.

I guess I was just surprised by the lack of visible investment required out of earnings, I'm used to thinking of it as roughly; half the earnings go out as divis, and half go to investment which creates the growth. I knew buybacks were large in the US, but didn't realise they were SO big across the market as a whole. I guess it's related to Jim's comments about how the best modern businesses are generally asset light, so perhaps the investment required doesn't show up in the numbers in the way I was thinking of it. I'm not too concerned anyway, so we don't need to beat this whole thing to death.

Cheers,
SA

* I'm often impressed by open source sw, and have followed the stockfish project for several years now. For anyone interested in the amazing strength of modern computer chess (admittedly, the team is rather larger than just 1 person), see:
https://tcec-chess.com/ (big hw, long time control competition, currently running the top league in their 24th Season, to be followed by a 100 game match between the 2 best engines)
https://www.chess.com/computer-chess-championship (A newer rival to TCEC)
https://github.com/official-stockfish/Stockfish (code)
https://tests.stockfishchess.org/tests (test rig)

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