When’s the best time to do a buyback?
At Berkshire Hathaway’s 2004 annual meeting, Warren Buffet shared a simple rule of thumb for buybacks:
“When stock can be bought below a business’s value it is probably the best use of cash.”
Of course, that’s easier said than done.
“The tough part is coming up with the intrinsic value. There is a lot more to intrinsic value than P/E,” he said in 2016. He’s also said that there is no single metric that can justify or reject a buyback; instead, a combination of factors must be considered.
Buybacks can also raise a possible red flag. If a company is doing a buyback, it might be because they can’t think of a good acquisition, asset purchase, or other capital-intensive business expense to deploy their cash towards instead.
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