Share repurchase in my books
I suggest that friends read the last 5-6 sections of the book “The Rules of Super Growth Stocks Investing” and the last 6-7 sections of the book “The Rules of 10 Baggers” about stock repurchases, and then come back Read this article again, it will be helpful to everyone.
Pros and cons of share repurchase
The main point I mentioned in my two books is that listed companies that actively carry out share repurchases can make the company’s stock price obtain obvious support in a bear market, which is more resistant to falling than other stocks.
Although the stock repurchase plan is usually decided by the board of directors of listed companies, and the company is authorized to implement it within a few years. But in practice, the stock repurchase plan is often regarded as a vote of confidence cast by the management in listed companies. The repurchases boom has supported stocks amid wildly divergent views on the path of monetary policy.
When a company repurchases its own stock, increased demand for the stock typically pushes up the stock price. Share repurchases do not impose additional taxes on taxable investors until the shares are sold and a capital gain is realized, unlike dividends, which subject investors to additional taxation by the government.
What’s in the real world?
According to S&P Dow Jones Indices, share repurchase by S&P 500 companies are expected to surpass the $1 trillion calendar year mark for the first time in 2023. Share repurchase by those companies totaled more than $220 billion through Feb. 17, the most on record for that time of year, according to a Goldman Sachs Group Inc. (ticker: GS) analysis of companies in the S&P 500 and Russell 3000 indices.
U.S. government opposes stock repurchase
On August 16, 2022, the President of the United States signed a $430 billion “Inflation Reduction Act“, which provides for a 1% tax on corporate stock repurchases. But obviously, it is difficult to stop the stock repurchase of listed companies. (please refer to my previous blog post “The impact of the Inflation Reduction Act on US stocks” on the detal of Inflation Reduction Act.
As such, public companies continue to draw the wrath of the U.S. government over their share buyback programs. In his State of the Union address earlier this month, U.S. President Joe Biden criticized big oil companies for using record profits to buy back stock. He proposed raising the current 1 percent federal repurchase tax to 4 percent. However, the industry is generally not optimistic that the bill to increase to 4% can be passed in Congress.
Buffett’s view on share repurchase
As we all know, Buffett strongly advocates corporate stock repurchases. For details, please refer to the explanation in my previous blog article “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“.
In his 1997 letter to shareholders, Buffett wrote: ” Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today’s repurchases, made at loftier prices.”
Warren Buffett defended stock buybacks in his 2022 letter to shareholders, published in February 2023. Buffett wrote: “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. 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.
Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.”
“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).”
At the Berkshire shareholder meeting in May 2022, Buffett pointed out that many criticisms of stock repurchases are misguided. In fact, repurchases are a good thing for investors in a company. He cited the example of American Express. Berkshire has held American Express for more than 20 years. Because of American Express’s buyback, its shareholding ratio has increased from about 11% to 20%.
In 1998, we had about 150 million American Express shares. We owned 11.2% of the company in 1998. They gave us a quarterly dividend. Now we own 22%. They bought back stock, and in doing so, we got to 20% ownership. “Repurchase is a good thing for investors. As long as the price is right, the company’s repurchase and self-investment are good things.”
Buffett said at Berkshire’s shareholder meeting in May 2022: If Berkshire could choose between buying a company it likes or repurchasing shares, Berkshire would choose the former. The important thing, he said, is to improve the situation for shareholders. Buffett said we wouldn’t be buying our own stock if there was a deal on Monday. Buffett emphasized the value of share buybacks, joking that if enough people sold, he’d buy all of Berkshire’s stock. “Shares should only be repurchased when the price is attractive,” he stressed.
- “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“
- “The impact of the Inflation Reduction Act on US stocks“
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