- Warren Buffett, billionaire investor and chairman and CEO of Berkshire Hathaway, believes stock buybacks can often be the best use of corporate cash.
- Democratic senators Chuck Schumer and Bernie Sanders unveiled a plan this week to limit companies' ability to issue buybacks.
- Berkshire has recently been increasing its buyback activity. Buffett's largest stock holding, Apple, has completed eight of the 10 largest quarterly buybacks ever.
Warren Buffett has said in the past that he isn't "a card-carrying Democrat," but as the son of a conservative Republican congressman from Nebraska, he did ultimately break with dad on politics. Buffett has long been a supporter of liberal causes and candidates, dating back to at least the civil rights era and including public and financial support for the campaigns of both President Barack Obama and Hillary Clinton.
On policy, Buffett has publicly supported higher personal income taxes on billionaires. In a widely read 2011 op-ed in the New York Times headlined "Stop Coddling the Super-Rich," he wrote that there was something wrong with a tax code that resulted in his secretary paying more in taxes on a percentage basis than a person like himself, who had a majority of his wealth in stock rather than wage income.
But when it comes to the new attack on stock buybacks started this week by Senate Democratic leader Charles Schumer of New York and Sen. Bernie Sanders of Vermont, Buffett is less likely to be a vocal supporter. He has long separated his personal politics from what is best for his company and shareholders, and Buffett has long argued that in many instances the best use of all for corporate cash is share buybacks.
The Democratic war on buybacks is part of a broader messaging war making the case to Americans that the Trump tax cuts did not serve the vast majority of the country — corporations bought back their own stock with the tax savings rather than investing in workers and businesses. However, as financial advisor Michael Batnick, who runs the Irrelevant Investor blog, noted on Twitter this week, there is no end to the logic that "stock buybacks don't benefit the vast majority of Americans."
"Neither does the stock market. Time to shut it down," Batnick tweeted.
Stock buybacks are at record levels, but they were increasing for years before the tax cuts.
Buffett has a big financial interest in buybacks being preserved. His biggest stock holding, Apple, has been among the biggest buyers of its own shares in recent years. Berkshire Hathaway, which has never paid a dividend because Buffett is philosophically opposed to them, also has been increasing — and making more flexible — its buyback activity.
The buyback idea does not need to be seen as an example of a new far left "socialist" agenda from the Democratic Party, as some recent reports would suggest. In fact, buybacks were long discouraged by the federal government. It was not until November 1982 that the Securities and Exchange Commission under President Ronald Reagan adopted Rule 10b-18 which encouraged corporations to repurchase their shares without fearing allegations of stock manipulation.
There is logic beyond the stock manipulation context to support less buyback activity — the less cash going to buybacks the more cash on the balance sheet to invest in people and operations. Indeed, Buffett has maintained that there are many times when executive managers buy back their own shares for all the wrong reasons, but he has been clear over the years that there are times when a corporation faces no better investment choice than its own shares. He put it simply at the 2004 Berkshire Hathaway annual meeting: "When stock can be bought below a business's value it is probably the best use of cash."
Schumer and Sanders intend to introduce "bold" legislation that will prohibit a corporation from buying back its own stock unless it invests in workers and communities first, including things like paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.
Other billionaires and Wall Street figures associated with at least some liberal policy ideas have questioned the recent economic proposals from the Democratic Party. Former Goldman Sachs CEO Lloyd Blankfein attacked the buyback proposal this week. Former New York City Mayor and Wall Street billionaire Michael Bloomberg and Starbucks founder Howard Schultz are considering independent runs for president based on the idea that the center of the political spectrum is being neglected by both right and left.
Some comments Buffett has made in the past reveal his thinking on a few of the issues tied up in the buyback proposal. Buffett wrote in an op-ed for the Wall Street Journal in 2015 that there were better ideas than raising the minimum wage to $15 to help the poor in this country, such as expanding the Earned Income Tax Credit. He wrote it was clear that the wealth gap was growing, but "The poor are most definitely not poor because the rich are rich. Nor are the rich undeserving."
He went on to write, "We should wish, in our rich society, for every person who is willing to work to receive income that will provide him or her a decent lifestyle. Second, any plan to do that should not distort our market system, the key element required for growth and prosperity. That second goal crumbles in the face of any plan to sizably increase the minimum wage."
His views on personal income taxes and the EITC show a preference for the tax code as a way to reduce economic inequality.
Two leading think tanks on the left and right recently joined together in an effort to figure out how to find common ground and economically improve life in America. The Brookings Institution and American Enterprise Institute recommended in their November 2018 report, "Work, Skills, Community: Restoring Opportunity for the Working Class," an expansion of the Earned Income Tax Credit, which was already expanded during the Bush and Obama administrations, among other policy ideas, and they suggested a higher estate tax as one of the methods to pay for it.
When it comes to the Democratic senators' buyback proposal, the structure of Berkshire Hathaway shows how it might be a difficult idea to fairly implement across companies. Berkshire Hathaway is a conglomerate that owns many businesses operating in many sectors of the economy, from utilities to private jets, fast food restaurants, candy makers, clothing companies and grocery suppliers, but those businesses are operated and managed independently. Buffett has always made clear that he does not believe it is his business to tell someone else how to run their business. Berkshire Hathaway has hundreds of thousands of employees across these affiliated companies, but at its own headquarters, Berkshire directly employs only a few dozen people.
It is possible that billionaires who try to position themselves as reasonable will find it more difficult, if not impossible, to have their policy ideas given the benefit of the doubt. Howard Schultz is finding out how loaded the term "billionaire" is as he struggles out of the starting gates to mount a bid for the White House. Among the new wave of progressive leaders, the very existence of billionaires in America is the problem. And the idea that billionaires need to be abolished is gaining traction, with columnists finding the need to consult eminent ethicists about their very existence.
New star New York Democratic Congresswoman Alexandria Ocasio-Cortez recently said, "I'm not saying that Bill Gates or Warren Buffett are immoral, but a system that allows billionaires to exist when there are parts of Alabama where people are still getting [hookworm] because they don't have access to public health is wrong."
Buffett's views on buybacks have been offered at Berkshire's annual meetings and in interviews over the years. The following four buyback ideas from Buffett provide a summation of his thinking. They don't deal with the issue of income inequality in the U.S., but they do deal with why he thinks buybacks are a vital part of corporate cash management.
In a 2015 interview with CNBC, Buffett said, "Many management are just deciding they're gonna buy X billions over X months. That's no way to buy things. You buy when selling for less than they are worth. ... It's not a complicated equation to figure out whether it is beneficial or not to repurchase shares."
At the next year's annual meeting, in 2016, he added, "Anytime you can buy stock for less than it's worth, it's advantageous to the continuing shareholders ... but it should be by a demonstrable margin," he said.
At the 1996 Berkshire annual meeting Buffett explained one of the greatest benefits of stock buybacks to shareholders: You don't need to spend a dime to increase your percentage of shares held.
Speaking About Apple at the 2018 Berkshire Hathaway annual meeting, he said, "I'm delighted to see them repurchasing shares. ... You can say we own 5 percent of it. But I figure with, you know, with the passage of a little time we may own 6 or 7 percent simply because they repurchase shares. ... I find that if you've got an extraordinary product, and ecosystem, and there's lots to be done, I love the idea of having our 5 percent, or whatever it may be, grow to 6 or 7 percent without us laying out a dime. I mean, it's worked for us in many other situations."
Buffett noted in a May 2015 interview with CNBC that because big tech firms like Apple earn enormous amounts of money, even with R&D spending, they are likely to have trouble deploying all of their cash.
When questioned at the 2018 Berkshire annual meeting about Apple not using its huge cash pile for acquisitions, Buffett said if the tech company doesn't see an acquisition that's even more attractive, buying more shares is the right decision.
Berkshire vice chairman Charlie Munger said mergers often lead to a decrease in value. He added, "I think that a great many places have nothing better to do than to buy in their own stock, and nothing as advantageous to do as they can — as buying in their own stock."
At the 2016 meeting, Buffett said that buyback plans were getting "a life of their own, and it's gotten quite common to buy back stock at very high prices that really don't do the shareholders any good at all." He added, "It's fashionable and they get sold on it by advisors."
"Can you imagine somebody going out and saying, we're going to buy a business and we don't care what the price is? You know, we're going to spend $5 billion this year buying a business, we don't care what the price is. But that's what companies do when they don't attach some kind of a metric to what they're doing on their buybacks.
He issued a warning to investors by noting what most buyback announcements lack: "You will not find a lot of press releases about buybacks that say a word about valuation."
To learn more about Warren Buffett's views on the markets, investing and stocks, consult CNBC's new Warren Buffett archive.