Warren Buffett defends buybacks to Berkshire Hathaway shareholders

Warren Buffett offered a full-bodied defense of stock buybacks in his annual letter to Berkshire Hathaway shareholders Saturday, saying stock purchases by Berkshire and the dozens of public companies Berkshire owns are a boon for investors.

The 92-year-old investor’s comments came in the shortest annual letter he has published in decades, and accompanied results showing that Berkshire posted a loss of $22.8 billion last year.

Buffett’s defense comes weeks after a new tax on stock buybacks went into effect in the US. The tax was one of the few revenue-boosting measures to gain unanimous support from Senate Democrats when they passed the Inflation Reduction Act, President Joe Biden’s comprehensive climate and tax bill.

Proponents of the tax have argued that buybacks do little to bolster the underlying economy and could be spent on investments or returned to workers in the form of better pay. Others, including Buffett, contend that buybacks can offer a prudent way to allocate capital.

“When you’re told that all buybacks hurt shareholders or the country, or particularly benefit CEOs, you’re either listening to an economically illiterate or a well-spoken demagogue (characters that aren’t mutually exclusive),” Buffett wrote.

Performance (%) line chart showing that Berkshire outperformed the S&P 500 in 2022

Berkshire’s chief executive said buybacks “at value-added prices” benefit all shareholders, citing investments his company made in American Express and Coca-Cola in the 1990s.

While Berkshire has stopped buying new shares in these companies, American Express and Coca-Cola buybacks have boosted the sprawling conglomerate’s stake in the two companies, making Berkshire its largest investor.

Berkshire has ramped up buying its own stock in recent years, especially during times when Buffett found few attractive investment alternatives. The company spent $7.9 billion buying up its own stock in 2022.

Buybacks will be taxed for the first time this year, with officials expecting stock buybacks could generate $74 billion in revenue for the US Treasury over the next decade. That number could rise further if US politicians raise the tax rate from 1 percent.

Buffett told shareholders Saturday that he expects Berkshire to pay much more in taxes in the coming years as the sprawling conglomerate grows, calculating that the company has paid $32 billion in taxes over the past decade.

“We owe the country no less: America’s momentum has contributed enormously to the success that Berkshire has achieved — a contribution that Berkshire will always need,” he wrote. “We are counting on the American tailwind, and although it has been weakened from time to time, its momentum has always returned.”

Buffett offered a few words of wisdom for his thoughts on investing and the world in an annual letter that is usually lavished upon by the public.

The letter was only 10 pages long, about half the length of his letters since 2000, and included nearly a page of quotes from his longtime partner, Charlie Munger. His letters have become shorter with age; However, the hundreds of pages he has written to shareholders since the 1970s mean investors need only search his archives to find his views.

Column chart of page counts showing Shortening: length of Warren Buffett's annual letters

Buffett struck an upbeat tone as he delivered some of his biggest hits: “Efficient markets exist only in textbooks,” the critical importance of the “power of compounding,” and “avoiding behaviors that could lead to awkward cash needs at awkward times.” . .

“The lesson for investors: the weeds become less important when the flowers are in bloom. Over time, it takes few winners to work miracles. And yes, it helps to start early and live into your 90s too,” he wrote.

Berkshire reported earnings of $18.2 billion in the fourth quarter of 2022, down more than 50 percent year-on-year. For the full year, the company reported a net loss of $22.8 billion compared to a profit of $89.8 billion in 2021.

However, those numbers were dramatically impacted by the fall in the price of Berkshire’s $309 billion stock portfolio, which coincided with a broader sell-off in financial markets. Accounting regulations require Berkshire to report these unrealized gains and losses in its results each quarter.

Buffett said that measurement is “100 percent misleading when viewed quarterly or even annually.”

The company’s underlying businesses, which include BNSF railroad and ice cream supplier Dairy Queen, generated profit of $6.7 billion in the last three months of the year, down 8 percent year-on-year.

Buffett said that full-year operating income of $30.8 billion was a record high for Berkshire.

Line chart of Cash, Cash Equivalents and Short-Term Treasury Holdings ($Bn) showing how Berkshire Hathaway's cash position recovers as the company sells stock

The company’s cash position increased to $128.6 billion at year-end from $109 billion in September. Berkshire sold more than $16 billion worth of stock last quarter, dumping shares in chipmaker Taiwan Semiconductor Manufacturing, regional bank US Bancorp and Bank of New York Mellon.

Although Buffett didn’t add any new stocks to his portfolio last quarter, he has found other places to put Berkshire’s money. Earlier in the year, it spent tens of billions of dollars buying shares in oil majors Occidental Petroleum and Chevron, and in the fourth quarter, Berkshire’s acquisition of rival insurer Alleghany was completed.

The company announced on Saturday that it had acquired a 41.4 percent stake in truck stop chain Pilot Flying J for $8.2 billion in January, giving it a majority stake in the business. Berkshire first acquired a stake in the company in 2017, but had not disclosed financial details of the transaction as of this weekend.

The annual report also showed that Berkshire has increased investments in both its energy and rail businesses.

But the report offered further evidence of the unevenness of the US economy given Berkshire’s vast business empire employing more than 380,000 people.

The company said its clothing business, which includes the Fruit of the Loom brand, is being downsized as retailers struggle with increased inventory and declining sales. TTI, which distributes electronic components, said that “a slowdown in orders was seen in almost all regions in the fourth quarter.”

Higher interest rates have hit Berkshire’s building and construction divisions hard. Clayton Homes, a maker of modular homes, said its backlog has fallen sharply and expects new home sales to continue to be challenged.

And one of Berkshire’s crown jewels — auto insurance unit Geico — suffered its sixth straight quarterly insurance loss. Berkshire said it had enlisted the support of some U.S. states to increase the premiums it charges its customers, given the higher claims it has had to pay in recent years.

“As a result, we currently expect Geico to post an underwriting profit in 2023,” Berkshire said.

https://www.ft.com/content/97b87555-3b1a-408d-90c4-21cb45afecb9 Warren Buffett defends buybacks to Berkshire Hathaway shareholders

Brian Ashcraft

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