Thursday, December 5, 2019

Buffett on Repurchases

From the Berkshire Hathaway (BRKaletter released earlier this year:

"...repurchases should be price-sensitive: Blindly buying an overpriced stock is value destructive, a fact lost on many promotional or ever-optimistic CEOs.

When a company says that it contemplates repurchases, it's vital that all shareholder-partners be given the information they need to make an intelligent estimate of value. Providing that information is what Charlie and I try to do in this report. We do not want a partner to sell shares back to the company because he or she has been misled or inadequately informed.

Some sellers, however, may disagree with our calculation of value and others may have found investments that they consider more attractive than Berkshire shares. Some of that second group will be right: There are unquestionably many stocks that will deliver far greater gains than ours.

In addition, certain shareholders will simply decide it's time for them or their families to become net consumers rather than continuing to build capital. Charlie and I have no current interest in joining that group. Perhaps we will become big spenders in our old age."

Warren Buffett also said the following in an interview on CNBC back in May:

"Repurchases can be the dumbest thing in the world or the smartest thing in the world. and I've seen both but they're just -- repurchases by the company are just like purchases to us, they're dumb a one price and smart at another price. And I like it when companies -- I like it when we're invested in companies where they understand that. Many companies just repurchase and repurchase, you know, it's the thing to do..."

What's an intelligent action at one price becomes stupid at some higher price. Any conversation over whether repurchasing shares makes sense should begin with whether or not the stock is in fact cheap.

Estimate per share intrinsic value, judge how that value is likely to change over time, then buy at a nice discount to that value.

Repurchases generally won't make sense when value -- within a range -- cannot be judged with enough confidence. Some businesses have inherent durable advantages while others have extremely difficult to understand prospects.

Beyond that it's assessing how such an action compares to existing well understood alternative uses of that capital.

For example, if internal investments critical to future competitiveness are neglected -- in order to buy what looks like an inexpensive stock -- long-term shareholders will likely not be served well.

Share repurchases work when truly excess capital is used to buy shares at a clear discount and when alternative uses are correctly judged inferior.

Seems obvious enough, at least at first, yet corporate repurchase behavior too often reinforces the impression that it's rather less than obvious.


Long position in BRKb

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