Warren Buffett offered a comprehensive defense of stock buybacks in his annual letter to Berkshire Hathaway shareholders on Saturday, saying stock buybacks by Berkshire and dozens of other publicly owned companies are a boon to investors.
The comments of the 92-year-old investor come in the shortest annual letter that has been published in decades and accompanied by results that show Berkshire suffered a loss of $22.8bn last year, led by a slide in the value of its stock portfolio.
Buffett’s defense comes weeks after a new tax on share buybacks took effect in the US. The tax was one of several revenue-raising measures that found similar support among Democrats in the Senate during the passage of President Joe Biden’s Inflation Reduction, climate and tax law.
Proponents of the tax argue that buybacks do not strengthen the underlying economy and can be used to spend capital or return to workers in the form of better wages. Others, including Buffett, argue buybacks can provide a prudent way to distribute capital.
“If you are told that all repurchases are harmful to shareholders or the country, or especially beneficial to the CEO, you are listening to either an economic illiterate or a silver-clad demagogue (a non-exclusive character),” Buffett wrote.
Berkshire’s chief executive said that when buybacks are “made at a fair price” they benefit all shareholders, referring to his company’s investments in American Express and Coca-Cola in the 1990s.
While Berkshire has stopped buying new shares in the business, buybacks completed by American Express and Coca-Cola have increased the conglomerate’s holdings in the two companies and made Berkshire its largest investor.
Berkshire has increased its own stock purchases in recent years, especially as Buffett finds some attractive investment alternatives. The company is spending $7.9bn in 2022 to buy back its own shares.
This year’s repurchases will be taxed for the first time, with officials estimating the stock buybacks could generate $74bn in revenue for the US Treasury over the next decade. That number is likely to rise if US policymakers increase the tax rate by 1 percent.
Buffett told shareholders on Saturday that he expects Berkshire to pay more taxes in the coming years as the conglomerate grows, calculating that the company has paid $32 billion in taxes over the past decade.
“We owe the country no less: American dynamism has made a huge contribution to whatever success Berkshire has achieved – Berkshire’s contribution will always be necessary,” he wrote. “We rely on the American Tailwind and, although it has slowed down from time to time, the propelling force always returns.”
Buffett offers a few nuggets of wisdom in his annual letter that the public usually pours into for his thoughts on investing and the world.
The letter is a brief 10 pages, about half the length of a letter from 2000, and includes nearly a page of quotes from longtime partner Charlie Munger. His letters have grown shorter with age; However, the hundreds of pages that have been written for shareholders since the 1970s mean that investors only have to dig through their archives to find their views.
Buffett has an optimistic tone when he delivers some of the biggest hits: “Efficient markets are only in textbooks”, the importance of “joint forces”, and “avoid behavior that can lead to an unpleasant need for cash at an unpleasant time”.
“A lesson for investors: The grass dries up when the flowers bloom. In the long run, it only takes a few winners to work miracles. And, yes, it helps to start early and survive the 90s, too,” he wrote.
Berkshire reported a profit of $18.2bn in the fourth quarter of 2022, down more than 50 per cent from the previous year. For the full year, the company posted a net loss of $22.8bn, from a profit of $89.8bn in 2021.
However, the figures were heavily impacted by a drop in the value of Berkshire’s $309bn stock portfolio, which collapsed alongside a further sell-off in financial markets. Accounting rules require Berkshire to report unrealized gains and losses each quarter in its results.
Buffett said this measurement is “100 percent misleading when viewed on a monthly or even annual basis”.
The company’s core businesses, which include BNSF railroads and ice cream supplier Dairy Queen, generated $6.7bn in revenue in the last three months of the year, down 8 per cent from a year earlier.
Buffett said full-year operating earnings of $30.8bn were a record high for Berkshire.
The company’s cash pile stood at $128.6bn at the end of the year from $109bn in September. Berkshire last quarter sold more than $16bn of stock, dumping shares in chip maker Taiwan Semiconductor Manufacturing, regional bank US Bancorp and Bank of New York Mellon.
Despite not adding any new stocks to his portfolio in the last quarter, Buffett has found other places to deploy Berkshire’s cash. Earlier in the year he spent tens of billions of dollars buying up shares in the oil major Occidental Petroleum and Chevron, and in the fourth quarter Berkshire’s takeover of rival insurance company Alleghany was completed.
The company announced Saturday that it had bought a 41.4 percent stake in truck stop chain Pilot Flying J for $8.2 billion in January, giving it a majority stake in the business. Berkshire first bought an interest in the company in 2017 but had not disclosed the financial details of the transaction until this weekend.
The annual report also showed Berkshire increasing capital spending in its energy and rail units.
But the report, due to Berkshire’s business empire of more than 380,000 employees, offers another sign of the uneven US economy.
The company said its apparel business, including its Fruit of the Loom brand, is declining as retailers struggle with higher inventories and slowing sales. TTI, which distributes electronic components, said that “the pace of new orders was observed in almost all regions in the fourth quarter”.
Higher interest rates have hit Berkshire’s building and construction unit acutely. Clayton Homes, a manufacturer of modular homes, says its backlog has fallen significantly and expects new home sales to remain challenging.
And one of Berkshire’s crown jewels – Geico’s auto insurance unit – suffered its sixth consecutive quarter of underwriting losses. Berkshire announced that it has received support from several US states to increase the premiums charged to customers, due to higher claims being paid in recent years.
“As a result, we now expect Geico to generate underwriting revenues in 2023,” Berkshire said.