Very little gets past Warren Buffett when it comes to investing. But even he seems genuinely amazed how stock buybacks are a "costless" way to make money.
XEight S&P 500 stocks, including internet retail play eBay (EBAY), biotech Biogen (BIIB) and Buffett's darling Apple (AAPL), are aggressively spending billions buying back stock. And they're doing it in a way that benefits investors, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. All these companies spent $4 billion or more in the past 12 months on stock repurchases and all of them also reduced their number of shares by at least 4%.
Buffett shined the spotlight on buybacks over the weekend in his annual letter to shareholders. And it's a reminder of how these maneuvers can be a free way to add wealth for you. Stock buybacks occur when companies use extra cash to buy some shares outstanding and retire them. This makes existing shares more valuable, as there are fewer and they claim a larger slice of the company.
"The math of repurchases grinds away slowly, but can be powerful over time," Buffett wrote. "The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses."
Looking At The Apple Example
Buffett steps S&P 500 investors through the power of stock buybacks using Apple, which accounts for roughly 40% of Berkshire Hathaway's portfolio.
Berkshire Hathaway aggressively bought shares of Apple up through mid-2018, Buffett said. At that point, Berkshire Hathaway owned 5.2% of Apple at a cost of $36 billion. "Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also — in 2020 — pocketed an additional $11 billion by selling a small portion of our position," Buffett wrote.
But despite not putting any more money into Apple, Berkshire owns a larger 5.4% stake in Apple. Why? "Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has
outstanding," Buffett said.
Specifically, Apple spent more than $81 billion buying back stock in the past 12 months. That's more than any other S&P 500 company, says Howard Silverblatt, index strategist at S&P Dow Jones Indices. Furthermore, Apple used the investment to cut its number of shares outstanding last year by 4.3% to roughly 17 billion shares.
"This agreeable dynamic continues," Buffett said. "Berkshire has repurchased more shares since year-end and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well."
That begs the question. What other S&P 500 companies qualify?
S&P 500 Companies Following Apple's Buyback Lead
EBay is certainly an example of how powerful buybacks can be. The online auctioneer spent more than $5 billion buying back its own stock in the past 12 months.
And it's not money wasted. EBay reduced its number of shares outstanding by more than 15% in 2020 from 2019. That's a larger share count reduction than any other S&P 500 company. The stock is up more than 68% in the past 12 months.
Just because a company buys back shares doesn't mean the stock must rise, though. Biotech firm Biogen spent more than $6.6 billion repurchasing stock in the past 12 months. And that buying cut its number of shares outstanding by nearly 15%. Still the stock is down more than 11% in the past 12 months. Should you buy Biogen now?
Follow The Stock Buyback Money
Buffett also makes the distinction of looking for S&P 500 companies that use buyback money to reduce shares outstanding. Here's an area that varies.
Google parent Alphabet (GOOGL) spent more than $31 billion buying back stock in 2020. That ranks it No. 3 in the S&P 500 in terms of the sheer amount spent buying shares. But its number of shares outstanding fell by just 1.9% as it also issues new shares, for compensation. And Long-Term Leader Microsoft (MSFT) paid $26 billion on its stock buyback in 2020. But its shares outstanding fell less than 1%.
Make no mistake, though, Buffett sees value in buybacks. Berkshire Hathaway's own number of shares outstanding was down 4.3% in 2020. The company spent more than $20 billion buying those shares, Silverblatt says. Berkshire Hathaway ranks No. 2 in the S&P 500 for the sheer dollar value of stock buybacks, Silverblatt says.
"Last year we demonstrated our enthusiasm for Berkshire's spread of properties by repurchasing the equivalent of 80,998 'A' shares, spending $24.7 billion in the process," Buffett wrote. "That action increased your ownership in all of Berkshire's businesses by 5.2% without requiring you to so much as touch your wallet."
Talk about free money.
Big S&P 500 Spenders On Buybacks
S&P 500 companies that spent the most on buybacks and cut shares outstanding by 4% or more
| Company | Symbol | Repurchase of Common Stock ($ Billions), In 2020 | % Change In Shares Outstanding 2020 | Stock 12 Month % Ch. | Sector |
|---|---|---|---|---|---|
| Apple | (AAPL) | $81.5 | -4.3% | 87.0% | Information Technology |
| Berkshire Hathaway | (BRKA) | $24.6 | -4.1% | 22.2% | Financials |
| Oracle | (ORCL) | $18.8 | -8.2% | 33.8% | Information Technology |
| Intel | (INTC) | $14.2 | -5.8% | 13.3% | Information Technology |
| Charter Communications | (CHTR) | $11.2 | -6.9% | 25.7% | Communication Services |
| Biogen | (BIIB) | $6.7 | -14.7% | -11.7% | Health Care |
| eBay | (EBAY) | $5.3 | -15.3% | 68.5% | Consumer Discretionary |
| Lowe's | (LOW) | $5.0 | -4.4% | 52.0% | Consumer Discretionary |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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