In a new interview with Yahoo Finance, legendary investor Warren Buffett, the CEO of Berkshire Hathaway (BRK-A, BRK-B), contended that stock buybacks, a practice that’s come under scrutiny lately, make “nothing but sense.”
During the fourth quarter, Buffett spent just over $421 million on share repurchases, including $233.8 million spent on buybacks of Berkshire Hathaway’s A shares between December 13 to December 24.
“If I knew, I'd have bought a lot more ... and that's not a big purchase for us, actually,” Buffett said of the December share repurchases in a wide-ranging interview with Yahoo Finance’s editor-in-chief, Andy Serwer.
Buffett is right that it’s not a big purchase for Berkshire Hathaway, which is sitting on approximately $112 billion in cash and cash equivalents.
“We will buy Berkshire when we have lots of excess cash, all the needs of the business are taken care of,” he said. “We spent $14 billion on property plant and equipment last year ... So we take care of the needs of the business, then we have excess cash.”
He added that he’d love to find other businesses to buy. However, in his widely-read annual letter published in February, Buffett said the immediate prospects for an elephant-sized acquisition “are not good” given the sky-high prices for businesses with “decent long-term prospects.”
In the same letter, though, he did tell investors that Berkshire "will be a significant repurchaser of its shares."
“[If] I think the stock — and my partner Charlie Munger thinks the stock — is selling below intrinsic business value, we will buy in stock,” he told Yahoo Finance.
His comments on buybacks come amid increasing criticism from Washington, D.C.
Earlier this year, Senate Minority Leader Chuck Schumer (D-NY) and Senator Bernie Sanders (I-VT) railed against the practice in a widely circulated op-ed and put forth legislation to curb buybacks, which the pair described as a "practice of corporate self-indulgence."
Senator Marco Rubio (R-FL) also plans to offer legislation to curb share repurchases. Senator Chris Van Hollen (D-MD) argued that company insiders should be prohibited from selling their own shares for a period of time after their firms announce buybacks. More recently, Senator Tammy Baldwin (D-WI) introduced a bill that would ban open-market buybacks.
Despite the unfavorable attention, the data continues to confirm that firms are buying back stock even more aggressively.
For his part, Buffett acknowledged that some people would misbehave in any activity.
“So it really wouldn't have much to do with buybacks,” Buffett said. “I think buybacks, the degree to which they've been part of nefarious activity — and I've observed them for a lot of years — are very close to zero. But that just may be that there aren't enough opportunities.”
Simply put, buybacks allow companies to distribute money to the shareholders. Another way of doing that is through dividends.
“And presumably, American business should distribute money to its owners, occasionally. And we do it through buybacks. We've done some. And we don't do it through dividends. But most companies do it through having a dividend policy.”
The bottom line is if companies have met the needs of the business and the stock is underpriced then buybacks make “nothing but sense,” Buffett said.
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