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Feb 27, 2023

Buffett defends buybacks in annual letter to shareholders

Buybacks have soared in energy sector amid record profits

Legendary investor Warren Buffett has defended share buyback programs in his widely read annual letter to shareholders.

Buffett, CEO of Berkshire Hathaway since 1965, during which time the company has delivered annual returns of around 20 percent, says buyback programs benefit ‘all shareholders’ if they are made at the right prices.

‘The math isn’t complicated: when the share count goes down, your interest in our many businesses goes up,’ writes Buffett. ‘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.’

Warren Buffett
Photo: Asa Mathat | Fortune MPW

In its fourth quarter results, published on February 25, Berkshire Hathaway says $2.6 bn had been used to buy back shares over the previous three months, with $7.9 bn repurchased over the full fiscal year.

Buyback debate

Share repurchases are common among US businesses but are often criticized for destroying value or being used to boost executive compensation.

US President Joe Biden recently introduced a 1 percent tax on buybacks and, in his State of the Union address in early February, proposed quadrupling it to 4 percent.

Focusing on record profits in the energy sector, Biden said executives had ‘invested too little of that profit to increase domestic production and keep gas prices down’.

S&P 500 buybacks fell 4 percent between the second and third quarter of 2022, according to a December report from S&P Global, but repurchases among energy companies soared 64 percent.

The focus on buybacks has led many CEOs, including Buffett, to address the topic during earnings season.

‘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),’ writes Buffett in the annual letter.