Buffett Blasts Stock Buyback Critics

Billionaire investor Warren Buffett slammed opponents of stock buybacks, saying they are “either an economic illiterate or a silver-tongued demagogue” and offered a full-throated defense for the practice.

In a widely read Berkshire Hathaway’s annual letter to shareholders, Buffett blasted, without mentioning names and avoided name-calling, aimed the scathing pushback on those have heavily railed against stock buybacks practice, most particular Democrats and high-profile critics such as President Biden.

“When you are told that all repurchases are harmful to shareholders or to the country, or 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),” Buffett wrote.

The “Oracle of Omaha” noted how buybacks are beneficial to shareholders while discusses how companies that buy back their own shares as a benefit to shareholders. In 2022, Berkshire Hathaway repurchased $7.9 billion of its own stocks, down over 50% from Q4 2021 profit of $39.6 billion, while reporting a record $30.8 billion operating profit. Despite calling 2022 a “good year” for Berkshire, Buffett downplayed the net results by noting stocks being volatile with shares being dampened by elevated inflation and other factors including rising interest rates and supply chain disruptions.

Buffett, a longtime Democrat who campaigned with Hillary Clinton in 2016 and according to his assistant voted for Biden in 2o20. sees buybacks as an important and harmless benefit to shareholders, who get to own a larger part of the business through its intrinsic value of its shares. His sharp words were just weeks after Biden delivered his second State of the Union address where he used parts of his speech to decry the practice while proposing quadrupling the 1% tax recently imposed. The White House claims the 4% corporate stock buyback tax would encourage such companies to invest in their growth instead of boosting shareholders.

“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices,” Buffett said. “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.”

“Imagine, if you will, three fully-informed shareholders of a local auto dealership, one of whom manages the business. Imagine, further, that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt,” Buffett asked.

The climate, health, and tax law dubbed the Inflation Reduction Act which passed last summer imposed a 1% excise tax on buybacks and went into effect earlier this year. It is the first time stock buybacks will be taxed and the Joint Committee on Taxation projects it will generate $74 billion in revenues over the next 10 years. However, estimates of the revenue collection may include an assumption that some companies shift toward taxable dividends.

Stock buybacks activity aggressively heated up this year with certain corporations irking Biden who uses this issue to criticize mostly “big oil” companies to falsely claim they prioritized buybacks over expanding production. Chevron Corp. announced last month a $75 billion stock buyback along with boosting its quarterly dividends by nine cents to $1.51 per share. Meta Platforms Inc, the parent company of Facebook unveiled a week later a $40 billion buyback.

Bolstered by these big companies corporate buybacks despite a gloomy earnings season, authorization repurchasing is on pace for a strong start to 2023 with the first quarter projected now to surpass Q4 2022. With less than 80 companies announcing planned stock buyback, so far it is estimated to be worth $200 billion in value, according to data from EPFR TrimTabs. In 2022, buyback announcements reached a record $1.2 trillion, EPFR TrimTabs reports, which tracking the announcements of the companies listed in the New York Stock Exchange, Nasdaq and American Stock Exchange.

“They invested too little of that profit to increase domestic production and keep gas prices down,” Biden said. “Instead, they used those record profits to buy back their own stock, rewarding their CEOs and shareholders.”

“Corporations ought to do the right thing,” Biden added. “That’s why I propose we quadruple the tax on corporate stock buybacks and encourage long-term investments. They’ll still make considerable profit.”

However, shareholders that Biden has constantly railed against consist mostly of households who own stocks either personally through their investments or their pensions and 401K retirement accounts. According to many tax groups, Biden’s proposal would “discourage investment and growth,” thus hurting American households, but mostly those retired, including seniors.

S&P Dow Jones Indices analysts predict the new buyback would likely reduce S&P 500 earnings by 0.5% in 2023, a tiny effect on corporate share-repurchase practices. Companies see 1% buyback tax as ineffective and would shift their behavior if they see the tax on the program reaches at least 2% or higher for one to shift some buyback spending to dividend payments.

Nonetheless, the reauthorization program is consider a boogeyman for the White House, with their lack of understanding of stock buyback. With companies offering stock buyback at a record pace, the underlying meaning behind the move is a weak signal that corporation see their stock as undervalued and believe this form of financial engineering will help to make one profitable in the future.

Biden’s 4% increase tax on stock buyback proposal is not expected to go very far given a divided Congress with Republicans controlling the House. With the battle over buyback remain to be determined in the current Congress,