Why Warren Buffett Loves Big Stock Buybacks
Investors have two traditional methods of getting capital returned to them by the companies they invest in. One is dividends, which can account for more than half of all total returns through time, and the second method is stock buybacks. Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) does not pay a dividend, but Buffett has outlined the manner in which he will repurchase his own company’s stock on the open market.
One thing that the last round of Buffett stocks for 2016 showed is that he loves stock buybacks. In fact, his top four equity investments have been buying back stock.
24/7 Wall St. wanted to focus on the top Buffett stocks, and all are involved in big buybacks as you might have guessed. We recently featured 18 companies that would lead all buyback activity in 2016, and at least two of these will be among those top 18 buybacks.
American Express Co. (NYSE: AXP) may be losing value at this time, but Buffett’s stake has remained the same 151.6 million shares for years now. Buffett has owned Amex shares for so long that he probably worries about the capital gains tax he would pay more than he worries about how much the shares have fallen from their highs. Still, American Express has suffered handily so far in 2016. Buybacks at the company in the past year increased Buffett’s stake to 15.6% from 14.8%.
Coca-Cola Co. (NYSE: KO) was the same 400 million share stake that it has been for many years. This stake dates back to when Buffett started buying Coca-Cola in the 1980s, and his cost basis must be nearing zero, if you include the dividends. Coca-Cola’s stock buybacks increased Berkshire Hathaway’s stake from 9.2% to 9.3% in 2015. And the company will keep buying back stock.
International Business Machines Corp. (NYSE: IBM) was maintained as the same sized stake in the fourth quarter, but Buffett added to this stake in 2015. Berkshire’s 81.03 million shares as of December 31 are now 8.4% of the entire company, and IBM will continue buying back stock in 2016 whether or not it should, growing Buffett’s total percentage of the company even if he doesn’t want to keep throwing money into a bad investment. This stake was about 79.5 million shares as of the end of last June, and the end of 2014 position was 76.971 million IBM shares.
Wells Fargo & Co. (NYSE: WFC) is the one bank that trades at a big premium to book value, but it is also the most free of all the giant money-center banks that can use its capital as it sees fit. The Berkshire stake of about 479.7 million shares at the end of 2015 was higher than the 470.29 million shares at the end of September. Buffett has grown his stake through time, but at a slower rate in the past year or more. Growing ever closer to being a 10% holder (9.8% at the end of 2015 versus 9.4% at the end of 2014), Buffett may be at the point where it is harder to grow that stake without more regulatory and more governance issues.