Warren Buffett during this pandemic found one stock which he kept on buying, his favourite – his own, Berkshire. He probably found it to be the best deal on the Street which explains why in Q2 he purchased his company’s shares to the tune pf $5.1 billion. This is more than double his $2.2 billion repurchase made in Q4 of 2019. Even in Q1 of 2020, he had decided to go slow on the buyback and had bought Berkshire shares worth $1.7 billion.
Buying back his own shares is in direct contrast with the $13 billion he made by cashing out on his entire aviation stock – the highest selling he made in 10 years. This cashing out made the already cash-flush Berkshire more so – its cash pile jumped up from $137 billion to a record high of $147 billion.
Warren Buffett’s company, Berkshire has not declared a single dividend since 1960 but yet shareholders flock to hold shares in this company. Why? Apart from the fact that it is a Warren Buffett company, he has helped create wealth for his investors – through consistent buyback of his own shares.
This is a very smart move because he could buy back the shares of Berkshire when it dropped below the 1.2 times book value metric. There are many companies, which, sitting on a cash-pile did not know what to do and resorted to indiscriminate buyback, paying little attention to value or price, often buying stocks at all-time highs.
What this also indicates is the power of liquid cash today – the stock price of many companies have been beaten down to pulp yet promoters are not able to buyback as they simply do not have the cash; for majority its preservation of cash for survival. Thus there are very few companies like Berkshire which, even in these times, have the luxury to buyback and still have enough.
This is a great time for cash-rich companies to buyback – it helps reduce floating stock, increases promoter stake, reduces its equity capital (outstanding shares) and thus improves EPS ahead. More importantly, promoter buying back props up the stock price in a falling market.
Buyback is a great tool for the promoters to improve their wealth – where CEOs and management pay is linked to stocks – stock options; thus buyback is a good way to boost their own income. Also by increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly EPS targets.
More importantly, cash which can be used for creating growth, either through acquisition or by ploughing back to fund capex plans, is now being diverted to buy back shares. How is this growth accretive? For Buffett, buying back his stock worth $5 billion from a cash of over $140 billion, is really like a drop in the ocean.
Buyback to some extent is good but consistent buybacks do not add value to the company. Extremely cash-rich companies like Reliance can afford to do that but not when cash is low and buyback is done using debt.