Warren Buffett explains the enduring power of stock buybacks 

Unlike dividends, which are typically implemented with the understanding that they will always be paid to shareholders unless there is a dramatic change in a business’s situation, buybacks offer management the opportunity to do what Buffett likes best: buy undervalued stocks.

In discussing why opportunistic buybacks are better than perennial dividends, Buffett told CNBC in February 2018, “The best chance to deploy capital is when things are going down.”

That echoes what he said this week on CNBC about a 10 percent decline in Apple being a good thing, because it means management would likely buy more stock.

In a 2015 interview with CNBC, Buffett said, “Many management are just deciding they’re gonna buy X billions over X months. That’s no way to buy things. You buy when selling for less than they are worth. … It’s not a complicated equation to figure out whether it is beneficial or not to repurchase shares.”

At the next year’s annual meeting, in 2016, he added, “Anytime you can buy stock for less than it’s worth, it’s advantageous to the continuing shareholders … but it should be by a demonstrable margin,” he said.

That is important for shareholders monitoring the C-suite at a time of record stock prices and buyback activity — corporations are flush with cash not only from increased profits but the recent corporate tax cuts — and it isn’t easy to offer a formula that proves a “demonstrable margin.”

Even though Buffett used 1.1-1.2 times book value in the past decade as a “conservative” way to justify a buyback, he told Berkshire shareholders many years earlier that neither price-to-earnings ratio or book value alone could be used to determine the efficacy of repurchases.

In moving back to monitoring of “intrinsic value,” he has opted for a buyback methodology that has also been used by JP Morgan CEO Jamie Dimon. “Jamie Dimon is very explicit about saying he’s going to buy back the stock when he’s buying it below what he considers intrinsic value to be,” Buffett told shareholders in 2016.

“If you’re repurchasing shares above a rationally calculated intrinsic value, you are harming shareholders. Just as if you issue shares beneath that figure, you are harming shareholders,” the billionaire said. “The tough part is coming up with the intrinsic value. There is a lot more to intrinsic value than P/E,” he added, though there is no way to work intrinsic value out to four decimal places, “or anything of the sort.”