5 reasons Warren Buffett loves stock buybacks, which US lawmakers plan to ban for companies they bail out

warren buffett

Warren Buffett has touted the value of stock buybacks for decades.
US lawmakers want to pass a coronavirus stimulus bill that temporarily bars companies that receive government bailouts from buying back their stock.
“Discussions about share repurchases often become heated,” the famed investor said in his 2016 shareholder letter. “Some people have come close to calling them un-American — characterizing them as corporate misdeeds that divert funds needed for productive endeavors. That simply isn’t the case.”
Here are five reasons why the Berkshire Hathaway boss is a lifelong fan of buybacks.

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Warren Buffett has trumpeted the value of stock buybacks for more than 50 years. Yet US lawmakers, as part of a potential $2 trillion coronavirus relief package, plan to ban companies that receive government bailouts from buying back their stock for the duration of the assistance plus one year, Bloomberg reported.

The famed investor’s stance came under fire this month after Bloomberg estimated that the five biggest US airlines splurged 96% of their free cash flow on buybacks over the past decade, and The New York Times reported they spent north of $19 billion repurchasing shares in the last three years.

Despite their splurges, Airlines for America recently requested up to $50 billion in government grants and loans to help the industry as coronavirus fears and transportation halts continue to decimate demand.

Critics blasted the airlines and other distressed businesses for spending billions repurchasing their shares and then demanding to be rescued, accusing them of enriching their shareholders at taxpayers’ expense.

“If there is so much as a DIME of corporate bailout money in the next relief package, it should include a reinstated ban on stock buybacks,” Rep. Alexandria Ocasio-Cortez tweeted this month.

“Any public company that receives a bailout or significant funding should not be allowed, by law, to do stock buybacks EVER AGAIN as part of their agreement,” billionaire Mark Cuban tweeted last week.

The bad press strikes a stark contrast to Buffett’s strident defense of sensible stock buybacks.

“Discussions about share repurchases often become heated,” he said in his 2016 letter to shareholders. “But I’d suggest that participants in this debate take a deep breath: Assessing the desirability of repurchases isn’t that complicated.”

“Some people have come close to calling them un-American — characterizing them as corporate misdeeds that divert funds needed for productive endeavors,” he added. “That simply isn’t the case.”

Here are five reasons why the billionaire investor and Berkshire Hathaway CEO is a lifelong fan of the controversial tool.

1. Shareholders benefit

Buffett and his partner, Charlie Munger, argue that stock buybacks can be hugely beneficial to shareholders in the right circumstances.

“Charlie and I favor repurchases when two conditions are met: First, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated,” Buffett said in his 2011 letter to shareholders.

The first condition rules out a company with more pressing needs from …read more

Source:: Business Insider – Politics

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