Bill Ackman Asks Warren Buffett about Coca-Cola's Buybacks..

Zone Seven, yes, um, Bill Amman from New York. Uh, there is there a price at which it's inappropriate for a company to use its capital to buy back its stock? Give me that again. For example, Coca-Cola at 40p. Is that a smart place for Co to deploy capital? I believe that with this question, Bacman believes that Coca-Cola was making a capital allocation mistake by doing buybacks while trading at a high premium like 40 times earnings, and he wanted to hear Buffett's opinion on this.

Well, it sounds like a very high price when you name it in terms of a PE to buy back the stock at that sort of number. But I would say this: Coca-Cola's been around, what, 12 years now? And there are very few times in that 112 years, if any, when it would have not have been smart for Coca-Cola to be repurchasing its shares. Coca-Cola is, in my view, among businesses that I can understand, it's the best large business in the world. I mean, it is a fantastic business, and we love it when Coke repurchases shares and our interest goes up. We owned 6.3% of Coca-Cola in 1988 when we bought in. We actually increased that a little bit a few years later. But if they had not repurchased shares, we probably would own about 6.7% or 6.8% of Coke now. As it is, we own a little over 8%.

Through repurchases, there are going to be about a billion 8-ounce servings of Coke sold around the world, or Coca-Cola products sold around the world today. 8% of that is 80 million, and 6.8% is 68 million. So there are 12 million extra servings for the account of Berkshire Hathaway being sold around the world, and they're making a little over a penny a serving. So, you know, that gets me kind of excited. And I I think it all I can tell you is I approve of Coke repurchasing shares. I'd a lot rather have them repurchasing shares at 15 times earnings, but when I look at other ways to use capital, I still think it's a very good use of capital. And maybe the day will come when they can buy it at 20 times earnings, and if they can, I hope they go out and borrow a lot of money to buy a ton of it at those prices. And I think we will be better off 20 years from now if Coke follows a consistent repurchase approach.

I do not think that is true for many companies. I mean, I think that repurchases have become in vogue and done for a lot of silly reasons. And so I, I, I don't think everybody's repurchasing of shares is well reasoned at all. You know, we see companies that issue options by the ton, and then they repurchase shares much higher. You know, I started reading about investments when I was six, and I think the first thing that I read was, you know, buy low, sell high. But these companies, through their options, you know, they sell low and then they buy high, and they've got a different formula than I was taught. So there are a number that we don't approve of. When we own stock in a wonderful business, we like the idea of repurchases even at prices that may give you nosebleeds. It generally turns out to be a pretty good policy.

Charlie, well, I think the answer is that in any company, the stock could get to a price so high it would be foolish for the corporation to repurchase its shares. Sure, and you can even get into gross abuse. Before the crash, the insole utilities were madly buying their own shares as a way of promoting the stock higher. It was like a giant Ponzi scheme at the end. So there's all kinds of excess that's possible. But the really great companies that buy at a high price earnings rate, that can be wise. Our interest in Geico went from 33% to 50% without us laying out a dime because Geico was repurchasing its shares. And we benefited substantially, but we benefited a lot more, obviously, when prices were lower. I mean, we would—our interest in the Washington Post Company has gone from nine and a fraction percent to 17 and a fraction percent over the years without us buying a single share.

But the Post, or Coke, or any number of companies don't get the bargain in repurchasing now that they used to. We still think it's probably the best use of money in many cases.

Zone 8, at the 1998 Berkshire annual meeting, Blackman's question prompted a brief but impactful exchange. Coca-Cola did decline significantly after 1998, seemingly aligning with Anan's point that waiting could have allowed for more significant buybacks at lower prices, leveraging the same amount of capital and even earning interest in the interim. However, Warren Buffett's response echoed the importance of consistent buybacks for outstanding companies like Coca-Cola, emphasizing their historical resilience and the long-term benefits of repurchasing shares. Buffett's insight gained additional weight when considering Coca-Cola's capital allocation decisions in the 1980s, where they veered off course by investing in ventures like movie studios. This historical context supports Buffett's stance that, for Coca-Cola, buybacks were a more reliable and efficient use of capital.

Moreover, the discussion extended to the nature of great companies like Coca-Cola, which often trade at higher valuations. Buffett highlighted that waiting for an opportunity sale might not always be practical given their infrequent occurrences in the stock market. A crucial aspect often overlooked is the patience required for buybacks to demonstrate their full impact. The magic of share repurchases becomes more pronounced after a substantial chunk, like ideally 70%, 80%, or even 90% of a company's outstanding shares are bought back. This underscores the importance of a long-term perspective when evaluating the effectiveness of stock buybacks.

In essence, this Q&A session provides a snapshot of the delicate balance between timing, patience, and the enduring wisdom guiding capital allocation decisions, offering timeless lessons for investors. Thank you for listening. If you like this one, please leave a like, comment, and subscribe. I'll see you in the next one.