2020: What does Buffett think about stock buybacks?

BECKY QUICK: This question comes from David Kass. He is a clinical professor of finance at the University of Maryland. And he says, “Berkshire has invested in many companies with stock buyback programs. Recently there’s been a backlash against buybacks. What are your views on this subject?”

WARREN BUFFETT: Well, it’s very politically correct to be against buybacks now, you know, and they’re going to incorporate it in the loan program.

The — there’s a lot of crazy things said on buybacks. Buybacks are so simple. I mean, it’s a way of distributing cash to shareholders.

And let’s just say that you and I and Greg — the three of us — decide to buy an auto dealership, or a McDonald’s franchise, or something. We each put a million dollars in, you know, or whatever the number may be.

And we get along with each other and the business grows and all of that. And one of us really wants to spend our share of the earnings. And the other two want to leave the money in the business to grow.

Now if the three of us did that, and we’re the only shareholders, we would not establish a 100 percent dividend payout for everybody. And we wouldn’t freeze the one that wanted to get out, either.

The logical thing to do is to buy a portion — whatever that person wants to spend annually from the earnings — buy a portion of their stock, and the other two find their interest in the company goes up. And the third person still has a little more of an interest by what they leave in, but they also can take some money out of the business.

You’re taking money out of the business in either case. And one you call dividends and you send it to everybody whether they want it or not. And with buybacks, you give it to the ones who want the money.

And I have been following a policy of giving away stock, now, since 2006. And I’ll give away a lot of stock. But the people — the philanthropies — that that receive it — the gifts — have to spend the money very promptly, within, you know — on a current basis, more or less.

So, they are getting $3 billion worth of stock, or whatever it may be. And I’m, in effect, reducing my interest in Berkshire. But I’m still — Berkshire is still retaining more capital than I’m giving away, so I have more dollars invested, but my interest goes down, and the people that need the cash to carry out the philanthropic efforts, they cash out the stock.

And I don’t force — I don’t force my sister, or whoever it may be, to take a bunch of money she doesn’t want. She wants it reinvested — all of it — reinvested in the business. And people that don’t want to, can sell some of their stock.

And the company ends up in the same position. We’ve distributed some of the capital that we don’t need for growth.

Now, whether the company should buy it depends on a couple of things. One is they ought to retain the money they need for intelligent growth prospects, that’s fine.

And secondly — and this is a point that’s never mentioned — they should be buying it back below what they think it’s worth. Now, they’ll make mistakes in that, but you make mistakes in a lot of businesses. But over — that should be the guiding principle.

And to my knowledge — JPMorgan — (CEO) Jamie Dimon said it once, and we’ve said it various times, you know — we retained — we will repurchase shares when it’s to the advantage of the continuing shareholder to have us do so.

But you read about all these buyback problems that we’re going to spend 5 billion buying it back, or 10 billion. Well, that’s like saying, I’m going to go out and buy some business this year for 5 billion without knowing what you’re going to get for the money.

It should be price sensitive, obviously. It should be needs sensitive, obviously. But when the conditions are right, it should also be obvious to repurchase shares, and there shouldn’t be the slightest taint to it any more than there is to dividends.

And people that have now, sort of, taken up the cries about how terrible it was that companies bought back stock — I will say it was terrible for them to pay dividends, too — (laughs) — and they’d have more money now, but they were doing what was intelligent at the time, and I hope they continue to do what’s intelligent as they go forth.

Greg?

GREG ABEL: No, I — the only thing I know you’ve commented on in the past, Warren, is that — I think the one thing we are seeing, and obviously, we’re supportive of buybacks — but there are companies that used — probably their financial engineering was just a little —

WARREN BUFFETT: Extreme.

GREG ABEL: — extreme and too cute, that effectively you’re using every ounce of your balance sheet to buy back stock at a time where you’re really creating no cushion for your business for any type of event or bump in the road, and I — you know, we’re going to see that, and I think that’s a very unfortunate outcome of them, and hence you get some of the backlash.

But there’s still companies, as you highlighted, many that do it right.

WARREN BUFFETT: Yeah. No, if they’re buying it back because it’s fashionable, because they really do like the idea that —there’s nothing wrong with doing — taking an action that increases the value of the remaining shares, but if they’re doing it very — and incidentally, I’ve been witness to some programs, where it really is stupid.

But I don’t think it’s immoral. I just think it’s stupid — (laughs) — you know, basically.

And — on the other hand, I — we favor companies that take care of all their requirements for growth and, as Greg says, maintain sound balance sheets and all of that, leave a margin of error for things that you can get surprised with, and if they find their stock selling below the — what the business is intrinsically worth, I think that they’re making a big mistake if they don’t buy in their stock, and —

It’s going to be a political football, and like I say, that when it becomes politically correct to do something in this country — if you’re a politician, the best thing to do is get on board. But Berkshire is going to do what it thinks makes sense for shareholders.

And we — and we like investing in companies that think that way, too. And not all companies, obviously, do.