Warren Buffett on the joys of buybacks — Apple’s and Berkshire Hathaway’s

“The math of repurchases grinds away slowly, but can be powerful over time.”

From Buffett’s “To the Shareholders of Berkshire Hathaway Inc.” 2020 edition, posted Saturday: 

Last year we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 “A” shares, spending $24.7 billion in the process. That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet.

Following criteria Charlie and I have long recommended, we made those purchases because we believed they would both enhance the intrinsic value per share for continuing shareholders and would leave Berkshire with more than ample funds for any opportunities or problems it might encounter.

In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse.

Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple.

Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position (emphasis mine).

Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.

But that’s far from all of the good news. Because we also repurchased Berkshire shares during the 2 1/2 years, you now indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018.

apple warren buffett buybacks mae west

This agreeable dynamic continues. Berkshire has repurchased more shares since yearend and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well. As these reductions occur, Berkshire shareholders will not only own a greater interest in our insurance group and in BNSF and BHE, but will also find their indirect ownership of Apple increasing as well.

The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses.

And as a sultry Mae West assured us: “Too much of a good thing can be . . . wonderful.”

My take: Sounds like Buffett finally sold some of his own Apple shares. First time he’s done that, I believe.

13 Comments

  1. Robert Paul Leitao said:
    In my view, Apple is committed to the well-being of long-term shareholders, not options jockeys and margin players. In my own research, I look for equities with strong balance sheets, rising net income and the ability to repurchase shares with funds sourced from deep-welled retained earnings while increasing dividends from net income growth. In short, it’s a description of Apple. It may sound old fashioned, but it’s worked for Warren Buffett and for the benefit of BRK shareholders. It’s also worked extraordinarily well for long-term Apple shareholders.

    6
    February 27, 2021
  2. Alan Trerise said:
    AAPL is 48% of Berkshire’s stock portfolio. 20% of Berkshire’s market cap.

    Now that is commitment.

    5
    February 27, 2021
  3. Robert Stack said:
    @Robert: As a relative newbie to this site (just renewed for the first time), I just want to say I especially appreciate your many insightful comments on PED’s posts. In fact, the entire “gang” here at 3.0 is stellar in their commentary and I have learned so much about my biggest investment (AAPL of course) that I felt confident in being able to retire at the end of January. I don’t even mind the occasional political commentary… 🙂

    8
    February 27, 2021
    • Bart Yee said:
      @Robert Stack Congratulations on your retirement and financial security. I dare say a number of us hit “critical mass” for retirement with AAPL as our core holding, literally a gift that has kept giving for the past 7+ years. Neither AAPL or the group here is complacent about having investments in a well run business model, execution at the design, manufacturing, marketing and customer service, plus R&D + innovation that strongly suggests future success.

      Doing good things to help people of all walks of life and providing products and services to do it, well, imagine that, it can be both proper and profitable.

      5
      February 27, 2021
    • Robert Paul Leitao said:
      Robert: Thank you for choosing to be a member of the Apple 3.0 community!

      2
      February 27, 2021
  4. Robert Paul Leitao said:
    I just finished reading Warren Buffett’s annual letter in its entirety. It’s brilliant in its simplicity and simply brilliant.

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    February 27, 2021
  5. Bruce Oran said:
    I have an idea for Phil. If everyone anonymously told Phil how many shares they own of Apple, 3.0 could calculate what % of Apple is owned by its membership. Though I would doubt it approaches Buffett’s holdings, I do not think it would be insignificant. It might be a fun statistic for Phil in marketing 3.0 and who knows, it might give Phil some added clout when dealing with Apple. Just a thought.

    5
    February 27, 2021
    • David Emery said:
      What I’d like to see is the statistics over our population, i.e. how many own 10 shares vs 10,000 shares, etc. The graph of ownership would be interesting.

      Another statistic of interest might be “when did you buy your first share of AAPL?” (Poor PED, he’ll show up at the far right of that curve. Of course, since all this would be anonymous data, we would have to guess which blip was actually PED 🙂 🙂 )

      1
      February 28, 2021
  6. Michael Goldfeder said:
    Warren Buffett has made a few mistakes in his portfolio of stock selections recently, but he can afford those mistakes because he has Apple as his fortress position that provides him “bus fare” in dividends to invest in other equities. The power of buybacks by Apple is just a wonderful backstop and safety net to have in place when the market artificially drops the price of the stock for no logical reason.

    I chuckle when the media inflates these yearly sales of Apple stock by BH with hysterical stories implying that Warren has lost confidence in the company. He sells a few paltry shares and his ownership % increases. As it does for every long term Apple shareholder.

    After seeing the silly drop last Friday at 12:59 PST, that just confirmed for me the stock will be going on a nice run up shortly. That’s why it’s important to remain invested in Apple and let Luca buy up shares from less informed short term sellers willing to sacrifice their shares for the Apple buyback program.

    4
    February 27, 2021
  7. Michael Goldfeder said:
    @Robert Stack: Let me also offer my congratulations on your successes that have put you in a position to retire. No doubt this extremely informative Apple site was the final impetus to making that dream come true.

    Although I must add that given the dearth of new material emanating from Hollywood these days, I was hoping for a remake of the “Untouchables.” I enjoy watching those along with Perry Mason on the golden oldies tv channels.

    Perhaps you’ll still consider some cameo appearances for your Apple 3.0 subscribers if they do come out with the “Untouchables 2.0”, as I’m absolutely certain the entire group here will be watching.

    2
    February 27, 2021
  8. Horace Dediu said:
    Selling Apple was a mistake and is a contradiction of his own thesis.

    11
    February 28, 2021
    • David Emery said:
      Unless he had another specific use for the cash (e.g. a charity?)

      1
      February 28, 2021
  9. Fred Stein said:
    Even at current depressed prices, that 5.4% stake (of Apple’s $2.1T market cap) is worth $113B, more that 3X the $36B cost.

    And that does not count the shares they sold, nor the dividends earned.

    5
    February 28, 2021

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