Okay, not really. But his 2016 annual shareholder letter with Berkshire Hathaway, released two days ago, includes a fresh discussion about stock buybacks, a topic heavily on my mind. Beginning on page 7, Buffett writes that share repurchases only make sense if the shares are purchased at a price below intrinsic value. He then states that it is “puzzling” that corporate repurchase announcements almost never refer to a price above which repurchases will be stopped. I doubt that it is really puzzling to Buffett due to how heavily stock incentives and options comprise total executive compensation and so setting an implied stock price ceiling based on a price, or even a valuation, at which point shares are no longer undervalued is not in those executives’ best interest. Nonetheless, it is exactly what executives should be doing since it is not the shareholders best interest to buyback company stock when it is not significantly undervalued.

Buffett’s suggestion is that each company should have a set price or valuation at which point repurchases should occur and above which they should not. Instead, company executives seem oblivious as to their own stock’s price with repurchases, even though they behave differently with acquisitions of other companies’ stock. On the other hand, with Berkshire Hathaway, stock buybacks will likely start to occur if the stock ever trades at less than 1.2 times book value. The desire is not to prop up the stock’s price, but rather at that valuation, Buffett believes that the stock will be trading at such a discount to fair value that purchases of Berkshire Hathaway stock is the best use of its own money.

Buffett also commented on the recent sentiment that stock buybacks have been harmful to society. His response is that buybacks are not the cause of any of today’s problems, as America has at all times been awash in funds waiting to be put to appropriate use even with the buybacks. I think that his response is an oversimplification of the situation and ignores (surprisingly) the long-term benefits of investing in people, plants and products even if such investments are not the clear best use of cash in the short-term.

-Richard

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