Dividends from Berkshire? Not on Buffett's Watch
Warren Buffett thinks he can do a better job managing his company’s cash than shareholders can.
For more than 45 years, Berkshire Hathaway (symbol BRK.B) has declined to pay dividends. A vocal group of shareholders would like that to change. But chief executive officer Warren Buffett has repeatedly expressed his views on the topic: No dice. “He feels he can earn a higher return for shareholders if he invests the company’s retained earnings, rather than if the shareholders did it themselves,” says David Kass, a finance professor at the Robert H. Smith School of Business at the University of Maryland in College Park.
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Kass, a Berkshire shareholder who regularly attends the company’s annual meeting (often with students in tow), will have a prime seat as the matter comes to a vote at this year’s annual meeting, scheduled for May 3. It is virtually certain that Berkshire shareholders will reject the resolution.
Berkshire unquestionably has the means to pay a dividend. According to the 2013 annual report, about 10% of the company’s assets, or $48.2 billion, is made up of cash. But the Oracle of Omaha has said he would pay a dividend only if he could not find investing opportunities that were more attractive, something that could happen if stocks became grossly overpriced. But even when the stock market reached extraordinarily high levels, as it did during the technology-fueled growth-stock boom of the late 1990s, Buffett declined to return cash to shareholders. “Part of his success in investing is his patience,” Kass says.
Buffett also needs ample cash in order to make acquisitions that are large enough for Berkshire, which is one of the biggest companies in the world by market value ($311 billion as of April 16). In 2013, the company laid out nearly $18 billion to acquire a major stake in H. J. Heinz, the ketchup maker, and to purchase all of NV Energy, a Las Vegas-based utility. In 2009, Berkshire acquired railroad Burlington Northern Santa Fe in a transaction valued at $44 billion. “If he turned the cash into a dividend, Buffett wouldn’t be able to find the next Burlington Northern deal,” says Robert Miles, who has written three books on Buffett and Berkshire Hathaway and created a graduate-level course, “The Genius of Warren Buffett,” which he teaches at the University of Nebraska-Omaha College of Business Administration.
Buffett said as much in his letter to shareholders in Berkshire’s 2012 annual report: “I have made plenty of mistakes in acquisitions and will make more. Overall, however, our record is satisfactory, which means that our shareholders are far wealthier today than they would be if the funds we used for acquisitions had instead been devoted to share repurchases or dividends.” Over the past ten years through April 15, Berkshire’s Class B shares returned 7.2% annualized, precisely matching Standard & Poor’s 500-stock index. But the company’s long-term record is superb. Since Buffett took over Berkshire in 1965, the company’s Class A shares have returned an astounding 20.7% annualized, more than double the return of the S&P 500. (The Class B shares were created in 1996.)
Buffett also argues that dividends are less tax-efficient than reinvesting profits in his company. That’s because Uncle Sam taxes a company’s profits before it pays dividends and then claims a share of the dividends unless investors hold stocks in tax-favored accounts, such as an IRA. Investors who need income, Buffett says, are better off simply selling some of their shares (assuming they’ve held the stock for more than a year and qualify for favorable long-term capital-gains treatment).
But Buffett may have another trick up his sleeve for returning cash to shareholders. In 2011, Berkshire’s board of directors approved a plan that allows the company to buy back shares whenever the stock price falls below 120% of Berkshire’s book value (assets minus liabilities). At Berkshire’s current price, the stock is trading for well above book value ($89.98 per Class B share). Berkshire bought $1.3 billion worth of its shares in 2012 and none in 2013.
But if you own Berkshire stock or plan to invest in the company, don’t count on getting a dividend soon. The more likely scenario is that the company will begin issuing dividends after Buffett, 83, and Berkshire vice-chairman Charlie Munger, 90, depart from the scene. “I do see a time in the future, after Buffett retires, when Berkshire will consider paying a dividend to attract and keep large institutional shareholders,” Miles says. In the meantime, you’ll just have to be satisfied with capital appreciation from Berkshire’s stock.