Two points about the stock buyback program that Warren Buffett's Berkshire Hathaway announced this morning:
1. It's tax-efficient for Mr. Buffett and other Berkshire shareholders as compared to some of the possible alternatives. Consider that Berkshire holds about $50 billion in cash. Suppose the company decided to distribute $30 billion of that to shareholders in the form of dividends. The shareholders would have to pay 15% tax on dividends received if they hold the shares in taxable accounts. After paying the tax, the shareholders could then do whatever they want with the money — spend it, invest it in something else, or, if they think that Berkshire Hathaway is attractive at the price, buy more Berkshire Hathaway. By using the cash to buy more Berkshire Hathaway, the company allows shareholders who keep their shares to essentially buy more of the company while skipping the step of paying that 15% tax.
2. Mr. Buffett addressed the issue of share repurchases in his 1999 letter to shareholders. He wrote then, "We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Nor will we attempt to talk the stock up or down." Mr. Buffett says he won't attempt to "talk the stock up." Yet the announcement today says that in the opinion of the Berkshire board and management, "the underlying businesses of Berkshire are worth considerably more" than 10% above their book value. What is that if not talking up the stock?