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"In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record
by mxschumacher 6y ago
"In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse."
For many companies, the approach seems to be "we've paid our dividends, we have some cash left over, let's buy back our own stock" - with a complete disregard for the valuation. Buying your own shares at too high a price (see GE and US airlines) is equivalent to incinerating money, whereas buybacks at low prices (Teledyne, Apple) do wonders for returns. If you run a listed business you have to think long and hard about what your firm is worth without just looking at the market price. William Thorndike's book "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success" [0] makes that point beautifully
Right now it is interesting to observe that many companies are doing the opposite of buybacks at a record clip, the share issuance of firms like Twillio is astounding.
[0] https://www.goodreads.com/book/show/13586932-the-outsiders https://www.goodreads.com/book/show/13586932-the-outsiders
- rini17 6y agoThey don't know what to do with the money, when there's no R&D anymore.
- IgorPartola 6y agoSo why not pay it out as dividends?
- votepaunchy 6y agoDividends are a forced distribution for the shareholder. With the ability to sell fractional shares, stock buybacks are equivalent to optional dividends.
- mxschumacher 6y agoAnd friendlier in regards to taxation. Doing a roundtrip of buying more shares with dividends means paying income taxes.
- jogjayr 6y agoI hear this a lot, but is it really true? For shares of US companies (or foreign companies listed on US exchanges) held for > 60 days before the ex-dividend rate, dividends are taxed at the long-term capital gains rate.[1] 1. https://www.investopedia.com/ask/answers/090415/dividend-income-taxable.asp https://www.investopedia.com/ask/answers/090415/dividend-inc...
- skybrian 6y agoThe rate may end up the same in many situations, but it’s still helpful to control the timing on when you pay long term capital gains. With dividends you’re still paying now rather than later, or perhaps never. (There’s no capital gains on donated stock or inherited stock.)
- christophilus 6y agoThe point is that you pay 0 tax until you sell. That’s better than being forced to pay long term capital gains every year on a dividend.
- IgorPartola 6y agoDo most people reinvest dividends in the same stock? What you say makes sense, but I can also see holding a stock and using the dividends for another use, for example just cash withdrawals or to buy another stock.
- yCombLinks 6y agoI don't know if it's "most people", but basically every dividend stock has a DRIP program that will automatically use your dividends to purchase shares of that stock. It's a very common strategy outside of the frenzied trading encouraged by apps like robinhood.
- rsj_hn 6y ago40% of corporate equity is owned by foreign funds that don't pay US taxes at all (thank you, capital inflows!) 30% of corporate equity is owned by tax advantaged retirement funds Only 30% of shares are even subject to this tax trade off discussion.
- ldbooth 6y agoSome would say this is equivalent to "we've got no better ideas, here, see if you can put the capital to work". Given they are known for expert capital allocation that'd undermine investor confidence.
- jacquesm 6y agoA buyback of company shares with company funds drives up the price of all the shares including those of the executives and board members making the decision.
- mxschumacher 6y agoWell, exchanging cash for an overvalued stock does not drive up prices for long. I have mentioned negative examples above
- jacquesm 6y agoIt only needs to be long enough to sell...
- lotsofpulp 6y agoI wonder if there is any measurable impact from share buybacks propping up or raising price which increases market cap which causes index funds to increase their holdings which then also props up or raises the price, etc.
- gweinberg 6y agoNo it doesn't. There are fewer shares in the company, but the company is worse less. There's no good reason to think that in general the remaining shares in a company will be worth more or less after buyback than what they would be worth if the company had simply held onto the money.
- jacquesm 6y agoTypically, when there is demand the price goes up, the stock price is not hard linked to the company value, it can lag, lead or even temporarily be correct but generally speaking it takes a while for an over or underpriced stock to catch up to the real value, long enough that there are whole industries dedicated to spotting these differences.
- esja 6y ago
- 11thEarlOfMar 6y agoI'd like to see a book about 8 CEOs who did everything wrong and wound up bankrupting the company. Not a blurb, like these 25[0], but an in-depth, biographical play-by-play. It takes decades to destroy a Blockbuster or Borders and likely there was more than one CEO involved. Decades is a long time to watch a train wreck and keep doing the wrong thing. [0] https://www.gobankingrates.com/money/business/most-epic-corporate-downfalls/ https://www.gobankingrates.com/money/business/most-epic-corp...
- 1123581321 6y agoTake a look at Jim Collins’ How the Mighty Fall. https://www.amazon.com/How-Mighty-Fall-Companies-Never/dp/0977326411 https://www.amazon.com/How-Mighty-Fall-Companies-Never/dp/09...
- sjg007 6y agoYahoo is a case study I think.
- dominotw 6y agoBut doesn't he mention how good the gains in apple ownership made by berkshire due to apples' own buyback program and their near future plans to buyback more. > repurchases when prices have risen Apple did and planning to the exact thing
- impulser_ 6y agoAnother example of good use of share issuance would be AMC. They have been raising a lot of capital during the pandemic through share issuing. Saving their business.