Buffett's Berkshire Buyback Helps Shareholders Dodge Taxes

Warren Buffett

Photo: trackrecord

Earlier today, Berkshire Hathaway announced that it would be buying back Class A and B shares.  The company will pay no more than a 10% premium to book value.”If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest,” said the company in a press release.

However, this announcement seems somewhat odd. Companies have several options when it comes to spending cash.  They can invest in growth by expanding their existing operations.  They can acquire companies they think are cheap.  However, when companies run out of growth opportunities, they send cash back to shareholders.

“[T]he buyback isn’t surprising,” says Vahan Janjigian, author of Even Buffett Isn’t Perfect. “Berkshire has grown so large, it cannot keep doing as well as it has in the past. It eventually has to start returning cash to stockholders either in the form of dividends or buybacks.”

From a company’s perspective, a buyback is no different than paying a dividend.

“Although a dividend conveys a sense of permanence, for all intents and purposes, a buyback is the same thing as a dividend,” says Janjigian. “After all, in either case, the company is simply handing out cash to stockholders.”

But here’s the kicker. Buffett, a fan of raising taxes on the wealthy, is effectively helping shareholders dodge taxes by electing to do a buyback over a dividend initiation.

“[L]ong-term capital gains and dividends are currently taxed at the same rate, yet there is still a small tax preference for buybacks. After all, if a corporation pays a dividend, it forces investors to take the money and pay the tax.”

In a buyback, on the other hand, investors are not forced to sell shares and realise a long-term capital gain.

Nonetheless, I find it ironic that the man who so strongly believes the wealthy should pay more tax consistently implements strategies designed to minimize the tax bite.

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