Consider the missed opportunity for IBM: Between 2007 and 2008, the company repurchased 268.3 million shares. If IBM had invested the $18.8 billion from 2007 along with $10.6 billion it used for repurchases in 2008 to buy shares at its low of $71.90 in October 2008, it could have acquired a whopping 408.9 million.
It’s All About Book Value
The Wall Street Journal reported in March that Exxon Mobil (XOM) repurchased $207 billion of its stock between 2003 and 2012. The article comes to the conclusion that XOM would have been far better off spending the money acquiring additional production rather than its stock.
To make matters worse, when it did make an acquisition, it drastically overpaid for XTO Energy, buying the natural gas producer for $40 billion in June 2010.
Forget that XOM overpaid for XTO for a moment and consider that when the stock hit $95 in 2007, the company repurchased $31.8 billion of its stock that year at an average cost of $82.38 per share. At the end of 2007, its book value per share (adding back $31.8 billion to book and 386 million shares to those outstanding) was $26.62 — meaning XOM paid 3.1 times book value for its shares.
Today XOM is trading around 2.5 times book value. Perhaps that’s the reason Berkshire Hathaway (BRK.B) acquired 40.1 million shares of the world’s largest oil company between July and the end of September. Interestingly, while Buffett is willing to pay 2.5 times book for XOM, he’s set a cap of 1.2 times book for his own stock. He knows it’s better to improve the business through acquisitions and capital expenditures than by gobbling up BRK.B stock.
Warren Buffett is definitely an enigma. He doesn’t always do what you think he’s going to do. But on share repurchases he’s crystal clear — he will not overpay for his company’s stock. So, why do others?
Well, for one, the executives of Intel, IBM and Exxon Mobil aren’t as smart as Warren Buffett; secondly, and more to the point, they do it because it makes them rich. It’s not hard to understand, but that doesn’t make it right.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.