Warren Buffett says Economic illiterates on critics of stock buybacks

Warren Buffett, the Chairman of Berkshire Hathaway, has lashed out at people who criticize stock buybacks in his annual letter to investors. In his opinion, those who oppose stock buybacks are either “economic illiterates” or “silver-tongued demagogues,” a reference to people who use persuasive language to gain support for their ideas.

Buffett’s comments are significant because they come at a time when the US government has implemented a 1% tax on buybacks. Critics of stock buybacks argue that they only benefit CEOs and top executives, who receive large amounts of stock options, while leaving other shareholders in the lurch. They also claim that buybacks take away from investments in research and development or other long-term growth strategies.

However, Buffett disagrees with this point of view. He believes that stock buybacks can be beneficial to shareholders as they increase the value of the remaining shares. This is because when a company buys back its own stock, it reduces the number of outstanding shares, which in turn increases the earnings per share (EPS) of the remaining shares. This can lead to an increase in the company’s stock price, benefiting all shareholders.

Buffett also argues that CEOs are not necessarily the main beneficiaries of stock buybacks. He points out that many companies use buybacks to offset the dilution of existing shares caused by stock-based compensation plans. This means that buybacks can actually benefit all shareholders by preventing a decrease in the value of their shares.

Buffett’s defense of stock buybacks is not surprising given his position as a major shareholder in many companies. Berkshire Hathaway itself has spent billions of dollars on stock buybacks in recent years, including a record $24.7 billion in 2020. However, his comments are likely to spark further debate about the merits of stock buybacks and their impact on shareholders and the economy as a whole.

While Warren Buffett may be biased in his defense of stock buybacks, his comments should not be dismissed outright. It is important to consider all sides of the argument when evaluating the impact of stock buybacks on shareholders and the economy.