1998: Is there a price at which it’s inappropriate for a company to use its capital to buy back its stock?

AUDIENCE MEMBER: Yes. Bill Ackman from New York.

Is there a price at which it’s inappropriate for a company to use its capital to buy back its stock?

WARREN BUFFETT: Give me that again?

AUDIENCE MEMBER: Example. Coca-Cola at 40 P/E. Is that a smart place for Coke to deploy capital?

WARREN BUFFETT: Well, it sounds like a very high price when you name it in terms of a P/E to buy back the stock at that sort of number. But I would say this: Coca-Cola’s been around a hundred and — what, 12 years now, and there are very few times in that 112 years, if any, when it would not have been smart for Coca-Cola to be repurchasing its shares.

Coca-Cola is, in my view, among businesses that I can understand, it’s the best large business in the world. I mean it is a fantastic business.

And we love it when Coke repurchases shares and our interest goes up. We owned 6.3 percent of Coca-Cola in 1988 when we bought in. We actually increased that a little bit a few years later. But if they had not repurchased shares, we probably would own about 6.7 percent or 6.8 percent of Coke now. As it is, we own a little over 8 percent, through repurchases.

There are going to be about a billion eight-ounce servings of Coke sold around the world — Coca-Cola products — sold around the world today. Eight percent of that is 80 million and 6.8 percent is 68 million. So there are 12 million extra servings for the account of Berkshire Hathaway being sold around the world. And they’re making a little over a penny a serving, so, you know, that gets me kind of excited. (Laughter)

I think it — all I can tell you is, I approve of Coke repurchasing shares. I’d a lot rather have them repurchasing shares at 15 times earnings, but when I look at other ways to use capital, I still think it’s a very good use of capital.

And maybe the day will come when they can buy it at 20 times earnings, and if they can I hope they go out and borrow a lot of money to ton of it at those prices, and —

I think we will be better off 20 years from now if Coke follows a consistent repurchase approach.

I do not think that is true for many companies. I mean I think that repurchases have become en vogue and done for a lot of silly reasons. And so I don’t think everybody’s repurchase of shares is well reasoned at all. You know, we see companies that issue options by the ton and then they repurchase shares much higher, you know —

I started reading about investments when I was six, and I think the first thing that I read was, you know, buy low, sell high. But these companies, through their options, you know, they sell low and then they buy high. And they’ve got a different formula than I was taught.

So there are a number that we don’t approve of. When we own stock in a wonderful business, we like the idea of repurchases, even at prices that may give you nose bleeds. It generally turns out to be a pretty good policy.

Charlie?

CHARLIE MUNGER: Well, I think the answer is that in any company the stock could get to a price so high it would be foolish for the corporation to repurchase its shares.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: And you can even get into gross abuse. Before the crash, the Insull utilities were madly buying their own shares as a way of promoting the stock higher. It was like a giant Ponzi scheme at the end.

So there’s all kinds of excess that possible, but the really great companies that buy at high price- earnings, that can be wise.

WARREN BUFFETT: Our interest in GEICO went from 33 percent to 50 percent without us laying out a dime, because GEICO was repurchasing its shares. And we’ve benefitted substantially.

But we benefitted a lot more, obviously, when prices were lower. I mean we would — our interest in The Washington Post company has gone from nine and a fraction percent, to 17 and a fraction percent over the years without us buying a single share. But The Post or Coke or any number of companies don’t get the bargain in repurchasing now that they used to. We still think it’s probably the best use of many in many cases.