Home » China concept stocks continue to repurchase!Buffett: When Berkshire buys a company that’s repurchasing stock, I want two things to happen Fortune

China concept stocks continue to repurchase!Buffett: When Berkshire buys a company that’s repurchasing stock, I want two things to happen Fortune

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China concept stocks continue to repurchase!Buffett: When Berkshire buys a company that’s repurchasing stock, I want two things to happen Fortune

  Tencent HoldingsPublished on the Hong Kong Stock Exchange on April 8announcementSaid to spend 300 million Hong Kong dollars to repurchase 815,000 shares. The price per share is HK$366.8-370.6.

This has been announced by Tencentperformancetenth time sincerepo,persist in”Fixed vote”, which has accumulated a total cost of 3 billion Hong Kong dollars.

Xiaomi Group announced on the same day that the company willHKEx3.7896 million shares were repurchased at a cost of HK$49.8734 million. The total number of shares repurchased by Xiaomi Group in the past three months is 67.6538 million shares, accounting for 0.27% of the company’s issued share capital.

March 22,Alibabaannouncedshare repurchasethe repurchase scale has increased from US$15 billion to US$25 billion, and the maximum repurchase scale is equivalent to nearly one-tenth of the market value.

From the repurchase of these real money, it can be seen that the company’s management has confidence in its future operations.

For companies, buybacks are unquestionably beneficial at a time when market prices are well below intrinsic value.shareholderthe behavior of.

Buffett also repurchases a lot when similar opportunities arise, as he put it: “You can’t go wrong buying a dollar for 80 cents.”

Buffett also has strict standards for buybacks, saying: “The Berkshire directors will only approve buybacks if they believe the buyback price is well below intrinsic value.”

He emphasizes that, in our view, this is the fundamental criterion for buybacks that is often overlooked by other managers.

In just the past 2021, Buffett repurchased a record number of Berkshire shares, totaling about $27 billion.

In the face of the current wave of repurchase of Chinese stocks, how to face it rationally? We look for answers from Berkshire, who understands the true meaning of buybacks.

  Buffett’s two criteria for buying back companies

Charlie and I will choose share repurchase when two conditions are met:

  1. The company has sufficient capitalto maintain normal operation and required current flow;

  2. The stock price is much lower than the conservative estimate of the intrinsic value of the company.

These are the two criteria Buffett gives for buying back stock.

These two criteria may seem simple, but Buffett said: “We’ve seen a lot of share buybacks that meet condition #1 above. You know, a lot of CEOs always think their company’s stock is too cheap.”

In Buffett’s view, share repurchases do not simply offset stocksAdditional issuanceEquity dilution brought about, or simply because the company holds excess cash.

He emphasized,only if the repurchase priceWhen the value of the stock is lower than the intrinsic value of the stock, the interests of shareholders who continue to hold will not be damaged.

The first rule of thumb when considering an acquisition or share repurchase is that at one price you are wise, but at another you may be foolish.

At this price, Buffett once promised that buybacks would not cost more than 110% of the book value of the shares, but this proved unrealistic.

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He later raised the bar to 120 percent.

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  The more we buy, the cheaper we buy, the more profitable the shareholders who continue to hold

Buffett is convinced that long-term investors would reasonably benefit from Berkshire’s 120% buyback cap.

If the default repurchase price is capped at 110% of book value, the repurchase significantly increases Berkshire’s intrinsic value per share.

And Buffett said: “The more we buy, the cheaper we buy, the better the profit for shareholders who continue to hold. Therefore, if there is an opportunity, we want to aggressively buy back stock, even at the price ceiling or slightly below. at the price ceiling.”

At the same time, Buffett also said he and Charlie have mixed emotions when a lot of Berkshire stock is selling below its intrinsic value.

Buffett wants to help shareholders who continue to hold more profitable, and when the stock price is only 90% of the intrinsic value, or even lower, the best law is to buy the stock.

Buffett quoted one of his directors as saying – it’s like shooting fish that have stopped jumping in a bucket that has already flowed.

In addition, Buffett does not want shareholders to sell before the stock price has reached its intrinsic value, although the price of repurchasing shares may be higher than the price preset by some shareholders.

“When we buy back, we hope that the exiting shareholders are fully aware of the value of the assets they are selling,” he said.

Buffett gave an example: If a business worth $3,000 has three equal partnerships, and one of them is bought for $900, the remaining two partnerships will each realize $50 in equity. increase. If the exiting partnership gets $1,100, the remaining two partnerships will each lose $50.

The same calculation applies to corporations and their shareholders.

Therefore, he said,The question of whether a buyback is a gain or loss of value to continuing shareholders depends entirely on the buyback price.

As a result, Buffett is puzzled by the fact that corporate stock buyback announcements never mention the repurchase ceiling price.

In his view, if a company’s management were to acquire other companies, this would not be the case. Price will always influence the decision to buy or not to buy.

Before discussing buybacks, the CEO and the board should stand up and make a statement that “it’s wise at one price, stupid at another.” In addition, Buffett also emphasized financial strength, saying: “If our current holdings are less than 20 billion US dollars, we will not enter the stock repurchase operation.At Berkshire, finances are, of course, more important than everything else.

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  When Berkshire buys companies that are buying back stock, I hope two things will come up

When Berkshire buys companies that are buying back stock, I want two things to come up:

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  First, we usually hope that corporate profits will have good growth in the future for a long period of time;

  First, we also expect stocks to underperform the market for a considerable period of time.

This is what Buffett wants to see.

He used IBM as an example. explained the problem.

IBM has 1.16 billion shares outstanding, and Berkshire owns about 63.9 million shares, accounting for 5.5%. The company may also spend around $50 billion to buy back shares over the next few years.

Buffett asked: “Our quiz today is: What should a long-term investor, like Berkshire, expect during this time?”

The answer he gave was – we should expect IBM stock to fall in the next five years.

If IBM’s stock price averaged $200 over that time period, the company would buy 250 million shares for $50 billion. That would result in an outstanding share count of 910 million, with Berkshire owning 7% of the company.

Conversely, if the stock sells at an average price of $300 over the next five years, IBM will only be able to buy 167 million shares. That would result in about 990 million shares outstanding in five years, of which Berkshire would own 6.5%.

The logic, Buffett says, is simple: If you’re going to be a net buyer of a stock in the future, either directly with your own money or indirectly (by owning a company that’s buying back stock), you’ll be victimized when the stock price rises, You benefit when stock prices are down.

Sadly, Buffett said: “Emotions often complicate things: most people, including those who will be net buyers in the future, are comfortable seeing the stock price go up. These shareholders are like seeing steamoil priceGrid rises happy commuters just because their gas tank is full for the daygasoline。”

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  Be wary of companies driving up share prices through buybacks

Most of the time, when a company announces a buyback, it is a good signal. Many companies Buffett has invested in have been buying back shares all the time, and the amount of shares bought back by many companies is quite shocking.

He said: “We like this kind of stock buybacks a lot because we believe that most of the time, the stocks that companies buy back are undervalued in the market. After all, the reason we hold these stocks is also because we believe they are undervalued. When the company’s operating scale continues to expand, but the number of outstanding shares continues to decline, shareholders will often benefit.”

But what we can’t ignore is that sometimes companies buy back stock, maybe just to push up the stock price.

Munger once reminded: “I think it is unethical to repurchase shares just to push the price higher, but if the purpose of repurchasing shares is fair and equitable, and can benefit our existing shareholders, this is a very good practice.”

When Buffett talked about buybacks, he also emphasized that he is interested in holding the stock market.

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Although he has received letters like this, the people who wrote them don’t care about intrinsic value, but want them to be the proponents of pushing up the stock price, using buybacks to make the stock price go up (or stop falling).

Buffett said: “If the person who wrote the letter is going to sell his stock tomorrow, his advice makes a lot of sense — to him! But if he is going to hold on, he should want the stock to fall, so that, We have the opportunity to buy aggressively. That’s the only way a buyback move will benefit surviving shareholders.”

Obviously, Buffett is not keen to use the name of buybacks to push up the stock price.

  He emphasized that we will never do buybacks to stop Berkshire’s stock price from falling. We will only do so if we believe that repurchase activity is an attractive destination for corporate funds. At best, repurchases have little effect on the future growth of the intrinsic value of a company’s stock.

In his view, too many repurchase activities in the market are not so much to increase the company’s per-share value as a way for management to “show” confidence and follow fashion.

In fact, it is not uncommon on Wall Street to use smoke bombs to say that they want to buy back in order to achieve the purpose of pushing up the stock price, and it is even more common in the A-share market.

Every year, a large number of companies are condemned by the exchange for not completing the repurchase as scheduled, and this is usually accompanied by the reduction of holdings by major shareholders.

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  Entrepreneurs and investors have the same goal

According to Buffett’s standards, buybacks should only be made when the buyback price is well below the intrinsic value.

Then, for entrepreneurs, it is very important to accurately judge the actual value of their company.

The premise is that the judgment is accurate, in order to say that the repurchase is decisive when the intrinsic value is determined to be much higher than the repurchase price.

This test is an entrepreneur’s judgment on the value of the company.

For investors, a company’s announcement of a repurchase is a signal, but in the end, it is necessary to judge the fundamentals of a company before making an investment decision.

This seems to confirm that doing business and doing investment have the same goal.

After the market has fallen sharply in the past, giant companies have come up with real money to buy back, which may be a good signal for the future market.

But for investors, if they want to find a suitable target, they still have to go back to the essence of business operations, that is, whether they can continue to create returns.

(Article source: Smart Investor)

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