Why Warren Buffett Doesn’t Pay a DividendBy Jared Cummans | Published July 16th, 2014
Warren Buffett, a man who needs little introduction, is arguably the most famous investor of all time. In the dividend world, he is also highly regarded, as much of his past investing work has been focused around companies that offer strong and rising payouts for their investors. But for a man who covets dividends so much, some are left scratching their heads when they find out that Buffett’s company, Berkshire Hathaway, does not pay a dividend for its shareholders – especially since the company’s cash pile is worth nearly $50 billion.
At first, this may come off as somewhat hypocritical, but a dive into Berkshire’s business goals and Buffett’s annual shareholder letters reveals a clear cut reasoning for why the company has yet to install a regular dividend.
Buffett’s Take on a Berkshire Dividend
In his 2012 annual shareholder letter, Buffett took several pages to specifically address the issue of dividends, as he admitted that a number of Berkshire shareholders wished for a dividend payout – some of which were even Buffett’s good friends. His response outlays Berkshire’s strategy of increasing shareholder value through meaningful acquisitions and investments, as well as numerical proof of why this strategy actually creates more value for a Berkshire shareholder than a dividend payment would.
When it comes to allocating earnings, Buffett had this to say: “A profitable company can allocate its earnings in various ways (which are not mutually exclusive). A company’s management should first examine reinvestment possibilities offered by its current business – projects to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors.”
He goes on to note that smart allocations, of which Berkshire has had plenty, increase a shareholder’s intrinsic value far more over time than a dividend would. While Buffett is not keen on paying out a dividend anytime soon, he does maintain a share repurchase policy that is quite favorable for Berkshire stakeholders.
Buffett and Share Repurchases
Buffett believes that disciplined repurchases are the “surest way to use funds intelligently” for shareholders, as long as purchases are made below the intrinsic value of the stock. If the opportunity presents itself, Buffett will not hesitate to snatch up BRK shares. The opportunity, as defined by Buffett, is any time the stock is available up to 120% of book value.
On the matter, Buffett stated “We originally said we would not pay more than 110% of book value, but that proved unrealistic. Therefore, we increased the limit to 120% in December when a large block became available at about 116% of book value.” This came from the 2012 annual report.
Berkshire’s profits have continued to climb, which has made the calls for dividends and repurchases only grow. Taking a look at what the company has been doing with its hard earned cash, however, reminds investors that they are staying plenty busy.
Berkshire’s Use of Earnings
Berkshire made 27 acquisitions in 2013, each worth anywhere from $1 billion to $2 billion and higher. This included purchasing half of the H. J. Heinz Company (with 3G Capital Management) for a hefty $23 billion. For anyone who questions how well this strategy has worked, just look at the growth of BRK over the years. Berkshire Hathaway has managed an average annual return of 17.41% since it went public in 1990. Over that time the S&P 500 has averaged 9.46% by comparison. The chart below displays the annual returns of Berkshire Hathaway versus the S&P 500 since 1990:
Clearly, Berkshire’s strategy has led to big returns for its shareholders, and it is a strategy that Buffett has no intention of changing anytime soon. The Oracle of Omaha has stated on several occasions that he likes to hold approximately $20 billion in cash at all times for purchases and acquisitions. Berkshire held $48.19 billion in cash at the end of 2013 and Buffett’s right-hand-man, Charlie Munger, said that the company would be “stark raving mad” not to make another major acquisition.
The Oracle has noted that he is keeping his eyes open and that he intends to put that cash to good use when he sees an investment suitable for Berkshire shareholders.
The Bottom Line
For those interested in Buffett’s full explanation of why Berkshire has avoided dividends, take a look at the company’s 2012 annual shareholder letter, written by Buffett himself, and go to page 19. Despite being one of the most prolific dividend investors of all time, Warren Buffett has strong reasons for why his company does not offer a dividend payout and why it likely will not do so anytime soon.
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