Companies can allocate their funds in various ways to create shareholder value. But in the eyes of legendary investor Warren Buffett, one method stands out above all others.
“If you do it at the right price, there’s nothing better than buying in your own business,” the Berkshire Hathaway CEO said during his company’s annual shareholders meeting in 2022.
Buffett was referring to stock buybacks. Basically, a company can repurchase its own shares from the open market, effectively reducing the number of shares outstanding. Consequently, the remaining shareholders get to own a larger portion of the company as their relative ownership stake increases.
He used American Express as an example to illustrate the power of buybacks.
Buffett mentioned that Berkshire purchased its last share of American Express around 1998, owning 11.2% of the payments company at the time.
“And now we own 20% of American Express. That’s what’s happened because they repurchased shares,” he explained.
“It’s a wonderful thing if you’ve got an asset you like and they take your ownership interest up.”
These days, companies flush with cash are spending billions of dollars on buybacks. Here’s a look at three that are particularly generous.
Apple Inc. (NASDAQ: AAPL)
According to S&P Global, Apple spent $94.1 billion on buybacks in 2022, up from the $88.3 billion it spent in 2021.
But it shouldn’t come as a surprise. Commanding a market capitalization of $2.75 trillion, Apple reigns as the largest company in the U.S.
It’s known for having a huge cash pile. According to the latest earnings report, Apple’s cash, cash equivalents and marketable securities totaled $166.3 billion as of April 1.
Apple also happens to be a Buffett favorite — it is the largest publicly traded holding in Berkshire’s portfolio.
“We knew that we would own an even greater interest if they kept buying in their shares, which — we didn’t have any insider information or anything — but certainly, it would seem the way to bet,” Buffett said about Apple at Berkshire’s shareholders’ meeting last year.
Alphabet Inc. (NASDAQ: GOOGL)
As the parent company of Google, Alphabet was created in 2015 to give Google’s wild ideas some room to play. The company boasts a vast array of ventures, from dominating the search engine market to dabbling in self-driving cars and life sciences.
S&P Global reports that Alphabet’s buybacks totaled $59.3 billion in 2022, marking an increase from the 2021 figure of $50.3 billion.
Despite being a tech behemoth, Alphabet stock has been volatile: Shares have climbed 20% in 2023 but are still down about 4% compared to a year ago.
Some consider the increasing popularity of OpenAI’s chatbot ChatGPT a threat to Alphabet’s business. But Alphabet is not standing still, as the company is also advancing its own artificial intelligence (AI) products.
“In March, we introduced our experimental conversational AI service called Bard,” Alphabet CEO Sundar Pichai said in the latest earnings conference call. “We’ve since added our PaLM model to make it even more powerful, and Bard can now help people with programming and software development tasks, including code generation.”
Meta Platforms Inc. (NASDAQ: META)
Shares of Facebook parent Meta Platforms had a rough ride in 2022, and the company took advantage of the lower prices through buybacks. According to S&P Global, Meta repurchased $31.6 billion worth of its shares last year.
And now, the stock is making a comeback. Year to date, Meta shares have surged more than 80%.
A solid first-quarter report helped boost the stock’s appeal. For the quarter, the company earned a profit of $2.20 per share on $28.65 billion of revenue. Both numbers beat Wall Street’s expectations.
Meta also continued to expand its user base. In the first quarter, Facebook’s monthly active users grew by 2% year over year, reaching 2.99 billion. Across its family of apps, Meta’s family monthly active people rose 5% year over year to 3.81 billion.
The bottom line
Remember, Buffett mentioned that buybacks should be done “at the right price.” So the fact that a company is spending big dollars on buybacks doesn’t automatically make it a good investment.
Besides, there are other ways for companies to return cash to investors, such as paying a regular dividend. If your goal is to earn a steady stream of passive income, you might want to look into reliable dividend plays — both in and outside the stock market.
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This article Warren Buffett Says, ‘There’s Nothing Better’ Than This Strategy If You ‘Do It At The Right Price.’ Here Are 3 Companies Leading The Pack In This Area originally appeared on Benzinga.com
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GPT’s reaction to this article:
This article discusses Warren Buffett’s preference for stock buybacks as a way for companies to create shareholder value. The article highlights three companies, Apple, Alphabet, and Meta Platforms, that have been particularly generous with their buybacks. However, the article also notes that buybacks should be done “at the right price” and that there are other ways for companies to return cash to investors, such as paying dividends. Overall, the article provides useful information for investors interested in these companies and the strategy of stock buybacks.