This article was first published on GuruFocus.com by Holly LaFon.
Berkshire Hathaway CEO Warren Buffett extolled many of his portfolio holdings for repurchasing their shares, “some quite aggressively,” in his 2016 annual letter. Buffett, who is price-conscious and won’t repurchase his own companies’ shares at more than 1.2 times book value, a statement he last made good on in 2012, approved of his investees’ buybacks because he believes their shares “have in most cases been underpriced.”
“(Undervaluation, after all, is why we own these positions.) When a company grows and outstanding shares shrink, good things happen for shareholders,” Warren Buffett said in the letter.
As the market pushed higher, share buybacks in corporate America totaled $115.6 billion in the third quarter, falling 28% from the same quarter of 2015. S&P 500 constituents also repurchased fewer shares for the second consecutive quarter and spent the least on repurchases since the first quarter 2013. Most striking, the pace has taken a turn since almost one year ago, which saw the highest buyback spending $161.4 billion – the highest since 2007.
Corporate stock repurchases are vilified by some and loved by others. Because stock compensation forms the bulk of executive pay, it benefits them to buy back shares to increase their stocks’ prices and achieve quarterly EPS targets, even in high markets where undervaluation of their shares is not a motivation, a Harvard Business Review article said in 2014.
Warren Buffett and Share Buybacks
Warren Buffett has had several other thoughts on repurchases, though. At Berkshire, Buffett targets 1.2 times book value because he thinks the intrinsic value of the company far exceeds its book value. He also thinks the companies he holds that are aggressively buying back shares are undervalued by the market from their intrinsic value.
Further, Warren Buffett has recently also spoken favorably about his “Big Four” investments buying back shares because it increased his ownership in them. He then acknowledged that their repurchases lifted their share prices. Unlike the Harvard Business Review pointing out the self-interest in some executives buying back shares, Buffett has called the managers of the four companies “both talented and shareholder-oriented” and combined them with using retained earnings for “business opportunities that turn out to be advantageous.”
Buffett specifically named only Bank of America as a responsible share repurchaser, but there are other companies within his portfolio that are buying back their shares aggressively and “in most cases,” he said, these are undervalued.
The average share count of S&P 500 companies declined by 1.7% in the third quarter, and around 16% of companies repurchased more than 5% of their outstanding shares. Warren Buffett’s top five repurchasing companies reduced their share count by more than 6%.
Verisign, a cyber security and domain name business, bought its shares at a rate of 6.3% in the past year. In the fourth quarter, it bought back 2 million shares for $160 million or an average share price of $80, In the full-year 2016, it repurchased 7.8 million shares for $637 million, of $81.66. Both were substantially higher than GuruFocus’ DCF price estimate for the shares of $36.71.
In the fourth quarter, Verisign’s EPS rose to 84 cents from 76 cents in the same quarter a year ago. Full-year EPS also rose to $3.42 from $2.82 the previous year.
Verisign’s board authorized a share repurchase package of $641 million beginning Feb. 9, bringing its total repurchase program to $1 billion with no expiration date.
American Express, the payments company, bought back its shares last year at a rate of 6.7%. This included $4.4 billion spending on 70 million shares at an average price of $63 in 2016, compared to $4.5 billion spent on 59 million shares in 2015. GuruFocus assigned American Express shares a fair value of $78.99.
In the fourth quarter, the company reported EPS of 88 cents, declined from 89 cents the same period the prior year, and $5.65 for full-year 2016, increased from $5.05 in 2015.
American Express has a repurchase authorization of 150 million shares effective Sept. 26 with no expiration date.
DaVita, a kidney health company, repurchased its shares at a rate of 7.2% last year. The company expended $416 million on 6,718,658 shares for an average price of $61.96 per share. For the full-year, it bought 16,649,090 shares at a cost of $1.1 billion and an average price of $64.41. Both exceeded GuruFocus’ assigned DCF approximation of $51.60 per DaVita share.
The company reported fourth-quarter EPS of 81 cents versus a loss per share of 3 cents in the fourth quarter last year, and a $4.29 EPS for full-year 2016 versus $1.25 the period year.
As of Feb. 16, DaVita had $677 million remaining on its repurchase authorization.
Sirius XM Holdings
Sirius XM, a satellite radio company, repurchased its shares at a rate of 7.9% in the past year. It spent $1.67 billion to buy 420 million shares during 2016, paying roughly $3.98 per share on average, and In the fourth quarter, it retired 105,060,200 of its shares, paying an average of $4.37 per share. GuruFocus conferred a DCF fair price of $1.50 per share of Sirius stock.
Sirius reported EPS of 4 cents in the fourth quarter, compared to 3 cents in the fourth quarter the prior year, and 15 cents for 2016, increased from 9 cents the prior year.
At Dec. 31, Sirius’ board approved a $10 billion purchase of its stock with no expiration date.
United Continental Holdings
United Continental Holdings, the airline, retired its shares at the highest rate in Buffett’s portfolio – 13% last year. The company bought back $156 million of its shares and for full-year 2016 it used $2.6 billion to buy back shares at an average price of $51.80 per share. GuruFocus estimates the fair value of its shares much higher at $74.38 using a DCF calculation.
For the fourth quarter, the airline reported $1.26 per share, declined from $2.24 the same quarter the prior year and $6.85 for the full-year, declined from $19.47 in 2015.
At the end of the year, the company had $1.8 billion left of share repurchases authorized.