Asking Warren Buffett About Share Buybacks

Sometimes, they’re ‘the logical thing to do.’ Our expert agrees.

May 06, 2020
Finance

SMITH BRAIN TRUST  Maryland Smith’s David Kass never misses a Berkshire Hathaway annual shareholders meeting. For many years, he made an annual journey to the event in Nebraska, always with a group of students, and often to attend a private meeting with the so-called Oracle of Omaha himself, Berkshire CEO Warren Buffett.

This year, the meeting was held virtually, with questions submitted online, selected and read aloud by moderator and CNBC news anchor Becky Quick.

One of the questions came from Kass. “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?” Kass asked.

It’s a question that’s been on Kass’ mind for some time, with the practice coming under increasing criticism in the past year or more.

Buffett defended the practice, saying, “It’s very politically correct to be against buybacks now – and they’re going to incorporate this into the loan program. But there’s a lot of crazy things said about buybacks.”

In some cases, Buffett said, buybacks are “the logical thing to do.”

Kass agrees.

“I was hoping that Warren Buffett would defend the practice of share buybacks. And he did.” Kass has studied Buffett’s investments and philosophy for more than 35 years.

“A lot of politicians are using a broad brush to paint corporate buybacks, saying you should stop having them, that they’re really bad. Well, why?” Kass said.

For some companies, maybe they are bad, he said. And perhaps it’s fair to impose a rule that companies must end buybacks and dividends as a condition for companies wanting to receive federal government support, he added. “That’s fine. You don’t pay off your shareholders until you pay off the taxpayers,” Kass said. “That makes sense.”

But corporate share buybacks aren’t always bad. In fact, they’re a useful method of returning capital to shareholders, Kass said, and often result from companies not finding solid investment opportunities. When a company is on solid financial footing and has met its obligations, buybacks can boost a company’s share price, stimulating investment and boosting its future prospects.

Buffett, expounding on Kass’ question at the shareholders meeting, advised that business leaders who do buybacks should follow his guiding principle. “One, 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 at below what they think it’s worth.

“Now they’ll make mistakes in that, but you make mistakes in a lot of business decisions. But that should be the guiding principle.

“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.”

Read more of Kass’ reflections on the 2020 shareholders meeting:

Bloomberg News: Buffett’s virtual meeting turns spotlight on potential successor

China’s Sina Finance: Buffett Believes Stock Repurchases Are Necessary

Yahoo Finance: Buffett says stock buybacks aren't 'immoral,' but some are 'stupid'

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About the Expert(s)

David Kass

Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Sophomore Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), FOX TV, Bloomberg Radio, Wharton Business Radio, KCBS Radio, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by The Wall Street Journal, Bloomberg News, The New York Times and The Washington Post, where he has primarily discussed Warren Buffett, Berkshire Hathaway, the economy, and the stock market. 

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