President Joe Biden devoted part of his State of the Union to decrying stock buybacks, a practice he often rails against.
Oil and gas companies, he said, didn’t invest in production to keep gas prices down. “Instead they used the record profits to buy back their own stock, rewarding their CEOs and shareholders. Corporations ought to do the right thing. That’s why I propose we quadruple the tax on corporate stock buybacks and encourage long-term investments,” Biden said.
Warren Buffett, who campaigned with Hillary Clinton and, according to his assistant, voted for Biden, made an impassioned defense of stock buybacks in his annual Berkshire Hathaway letter to shareholders.
Buffett noted that Berkshire Hathaway
bought back 1.2% of its stock, while two of its portfolio holdings, Apple
and American Express
also did so.
“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices,” he said. Granted, he allowed, a company can overpay for repurchases, to the detriment of continuing shareholders.
“Imagine, if you will, three fully-informed shareholders of a local auto dealership, one of whom manages the business. Imagine, further, that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt,” he asked.
“When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” continued Buffett.
Biden’s stock buyback proposal isn’t expected to go very far with Republicans in control of the House of Representatives. However, the Inflation Reduction Act that Biden signed into law contains a new 1% tax on stock buybacks.