Buffett on Buybacks, Dividends and Investing Mistakes

Michael D. CPA-retired from CA posted over 3 years ago:

It is mathematically impossible for a stock buyback transaction to be “accretive” to a corporation (i.e., adding something to the corporation). Comparing a corporation’s “Equity” at the instant before a stock buyback, to the corporation’s “Equity” at the moment after, that corporation’s “Equity” is smaller by exactly the dollar amount of the stock buyback! On the Balance Sheet a stock buyback amount has reduced Total Assets (specifically “Cash in bank”) and in the second section, Total Liabilities and Equity, there has been an equal amount reduction (specifically to “Equity”). And remember, ultimately, the only thing the remaining common stockholders own is the dissolution net cash-value of a corporation’s “Equity”! A stock buyback is “accretive” to the remaining shareholders percentages of ownership, BUT NOT TO THE VALUE OF THEIR OWNERSHIP. Because, when that accreted, new larger percentage is multiplied times the new lesser “Equity”, THE VALUE IS EXACTLY THE SAME AS BEFORE THE STOCK BUYBACK OCCURRED. A stock buyback results in a few very large stockholders receiving a very large amount of money – IN TOTAL OFTEN LARGER THAN THE TOTAL AMOUNT PAID IN DIVIDENDS TO ALL OF THE STOCKHOLDERS DURING THE FISCAL YEAR – and those few have reduced their ownership (or perhaps sold all of their ownership), and it might be appropriate for the remaining shareholders to wonder why?? And, especially to wonder why the corporate management suite and the Board of Directors thought it was in the best interests of the corporation to facilitate their exit, by utilizing the corporation’s “Cash in the bank” (and sometimes even borrowing to have enough cash)?? Do you think it might have had anything to do with how the large amount of shares bought back voted in the most recent proxy on the compensation packages of corporate management and the Board of Directors?? Which makes me ask, does corporate management and the Board of Directors have a fiduciary responsibility to all the common stockholders??

Carl Fields from South Carolina posted over 3 years ago:

I too was somewhat surprised (and disappointed) by the brevity of Buffett's letter discussing 2022. I noticed that the discussion of the company's holdings of shares of other companies was particularly skimpy in the 2022 report. Unless I missed it, the report gave (slightly) detailed information for only the top five $-value holdings (plus Kraft and Occidental, which are treated on a different basis than "ordinary" stock-ownership investments). A few other holdings were mentioned when he listed firms where Berkshire has an over-10% ownership stake, but that section did not seem to mention exact percentages, number of shares owned, or the $-amount of those additional-firm holdings. I suspect that SOME of the reason for the shorter length of his letters, since around 2017, is that the company's Form 10-K is now distributed to shareholders as THE company annual financial report (with the chairman's letter as sort of a separate document "in front of" the 10-K). In this current format, some of the discussions of specific results of selected sectors of the company, which used to be discussed in the chairman's letters, are now covered in the various "Management Discussion" sections of the 10-K report.

Howard Chapman from SC posted over 3 years ago:

I have taken Buffett's advice by starting early and living into my 90s. In fact, I owned his stock until I realized it received great dividends but he kept them all. But dividends and buybacks should never be used in the same sentence since they are completely different. When I did graduate work in security analysis I believed the old adage that the value of a stock is the present value of its liquidation price plus all future dividends. So according to Buffett I am "economic illiterate". (Should I return my degree?) However, according to a discerningreaders.com article IBM has spent 201 billion dollars on buybacks. When I multiply 912 million outstanding shares by a price of $128 I get a value of 116.7 billion. If my math is correct we are short by 84.3 billion dollars. Therefore you could say that without the buybacks IBM would now be worth a negative 84.3 billion dollars, or minus $92.43 per share. As an owner during all of that time period I would rather have had the money in dividends.

Monk Jr Monk from Texas posted over 3 years ago:

I worked at IBM during the 90's until 2012. During that time, IBM bought back stock worth $75B. Those $75B did not go to the pocket of the company shareholders, and were not invested back into the business. How did that work out for the shareholders? The company was borrowing money to finance this mockery, and they starved their R&D. The rest is history. The C section bosses are rewarded for earnings per share, and they are the sole beneficiaries of this financial engineering. The oracle of Omaha really gets it wrong.

Monk Jr Monk from Texas posted over 3 years ago:

I worked at IBM during the 90's until 2012. During that time, IBM bought back stock worth $75B. Those $75B did not go to the pocket of the company shareholders, and were not invested back into the business. How did that work out for the shareholders? The company was borrowing money to finance this mockery, and they starved their R&D. The rest is history. The C section bosses are rewarded for earnings per share, and they are the sole beneficiaries of this financial engineering. The oracle of Omaha really gets it wrong.

Rob Adams from NC posted over 3 years ago:

In a growing company, I wouldn't mind stock buybacks so much if (BIG if) management had sense enough to buy its stock only when the price was depressed. Essentially, they're buying me a bigger slice of a growing pie, but if they pay more than the slice is worth (which is all too often the case), it's the same as if I'm paying too much for the stock to begin with. In general, I'd much rather have a cash dividend. That way, I can decide whether to spend it on a bigger slice of the company's pie--or on something better.