Companies can use their funds in a variety of ways to create shareholder value. But in the eyes of legendary investor Warren Buffett, one method stands out above the rest.
“If you do it at the right price, there's nothing quite like buying your own company,” the Berkshire Hathaway CEO said during his company's 2022 annual meeting.
Buffett was referring to stock buybacks. Basically, a company can buy back its own stock on the open market, effectively reducing the number of shares outstanding. Consequently, the remaining shareholders get a bigger stake in the company as their relative ownership increases.
He used American Express as an example to illustrate the power of buybacks.
Buffett mentioned that Berkshire bought its last stake in American Express around 1998, when it owned 11.2% of the payments company.
“And now we own 20% of American Express. It happened because they bought back shares,” he explained.
“It's a wonderful thing when you have an asset that you like and they increase your ownership percentage.”
Today, cash-rich companies are spending billions of dollars on buybacks. Here are three that are particularly generous.
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Apple Inc (NASDAQ:AAPL)
According to S&P Global, Apple spent $94.1 billion on buybacks in 2022, up from $88.3 billion in 2021.
But it shouldn't come as a surprise. With a market cap of $2.75 trillion, Apple is the largest company in the United States
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 Buffett's favorite — it's the largest publicly traded holding in Berkshire's portfolio.
“We knew we'd have an even bigger stake if they kept buying their stock, which — we didn't have any inside information or anything like that — but it certainly seemed like the right bet,” Buffett said of Apple at Berkshire's shareholders' meeting last year.
Alphabet Inc (NASDAQ:GOOGL)
Alphabet, Google's parent company, was founded in 2015 to give Google's wild ideas space to play. The company has a wide range of ventures, from dominating the search engine market to experimenting with self-driving cars and life sciences.
S&P Global reports that Alphabet's buybacks totaled $59.3 billion in 2022, up from $50.3 billion in 2021.
Despite being a tech behemoth, Alphabet stock has been volatile: Shares are up 20% in 2023, but are still down about 4% year over year.
Some see the rise in popularity of OpenAI's chatbot ChatGPT as a threat to Alphabet's business. But Alphabet isn't standing still, as the company is also pushing ahead with the further development of its own artificial intelligence (AI) products.
“In March, we launched our experimental conversational AI service called Bard,” Alphabet CEO Sundar Pichai said in the recent earnings 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 company Meta Platforms had a rough run in 2022, and the company took advantage of the lower prices through buybacks. Meta repurchased $31.6 billion worth of stock last year, according to S&P Global.
And now the stock is making a comeback. Year-to-date, Meta shares are up more than 80%.
A solid first-quarter report helped boost the stock's appeal. For the quarter, the company posted earnings of $2.20 per share on sales of $28.65 billion. Both numbers beat Wall Street expectations.
Meta also continued to grow its user base. In the first quarter, Facebook's monthly active users grew 2% year over year to reach 2.99 billion. Across Meta's family of apps, the family's monthly active members grew 5% year over year to 3.81 billion.
The final result
Remember, Buffett mentioned that buybacks should be “at the right price.” So just because a company spends a lot of money on buybacks doesn't automatically make it a good investment.
In addition, there are other ways for companies to give cash back to investors, such as paying a regular dividend. If your goal is to earn steady passive income, you should look for reliable dividend opportunities — both on and off the stock market.
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In that article, Warren Buffett says, “There's nothing better” than this strategy when done “at the right price.” “Here are 3 companies that are leaders in this space” originally appeared on Benzinga.com
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