Why You Don't Want Berkshire to Pay Dividends

This year, Carol Loomis asked the question whether Berkshire (BRK.A) should start paying dividends since the stock price hasn’t risen in 5 years. This was in reference to Buffett's longstanding quote that he will pay a dividend when he thinks he can’t create at least $1 of market value for each $1 of retained earnings. Jeff Matthews refers to this as a question that Buffett avoided answering in this thought provoking blog post.

My opinion is, who cares whether Buffett answered the dividend question? If you are even asking the question, you should sell your Berkshire stock. The reason to own Berkshire is to get access to Buffett’s capital allocation decisions. Based on his well-documented track record and his well-know thought process, most Berkshire investors think Buffett can make better investment decisions and/or has access to better investment opportunities than they do. The last thing Berkshire investors should want is to have Buffett return the cash back to them in a taxable transaction. Then, the investors will have to decide how to allocate the returned cash.

Historically, investors have wanted management teams to pay dividends because they don’t trust management to spend the free cash flow from the business wisely. The business may be not need capital reinvestment, like Coca-Cola (KO), or it may be a business in secular decline where the best thing to do is harvest the cash rather than reinvest. Shareholders of these businesses probably want managements to pay dividends to make sure they don’t destroy value.

Since the main reason to own Berkshire is to get access to Buffett’s capital allocation skills, if investors want Berkshire to pay dividends, then they should sell the stock instead because they obviously don’t believe in Buffett’s ability to create value by allocating capital.

There is a scenario where it makes sense for an investor to want Berkshire to pay a dividend. Maybe an investor thinks Buffett destroys value but think Berkshire is so undervalued that he can make a return by owning the stock and getting Buffett to change his dividend policy. I don’t think Berkshire is anywhere close to a valuation level where this would make sense. At $91,500 per share, Berkshire trades at 1.4x tangible book. It would have to trade below tangible book value for this strategy to make sense.

The reason to invest in Berkshire is to get access to Buffett’s skills as a capital allocator. If you want him to pay a dividend, you shouldn’t own the stock. You should ignore the 5-year rolling test about whether he adds more $1 of value for each $1 of retained earnings. He is never going to pay a dividend because he’ll never admit that he can’t add value. If he ever does decide to pay a dividend, you won’t want to own Berkshire.

Disclosure: Long KO and no position BRK.A, BRK.B.

Comments

[Dividend Gr...:]

That's an interesting discussion. Now that BRK.A is so huge, I seriously doubt it would be able to outperform the S&P 500 by a significant margin over the next 2 decades. Why not return some of the cash to shareholders instead?

May 28 07:56 AM

[The Hammer:]

"My opinion is, who cares whether Buffett answered the dividend question? If you are even asking the question, you should sell your Berkshire stock. The reason to own Berkshire is to get access to Buffett’s capital allocation decisions.."
It seems to me that when companies hit the $200-$300 billion market cap they hit the proverbial wall. It is hard to grow a $200-$300 bil market cap company. Just to grow at 3% requires an additional $6 -9 bil a year...

I think it is getting close to the time for Buffett to start a dividend and announce the new leadership and transition this goliath over time.

May 28 08:46 AM

[tshk1221:]

The problem of BRK's no dividend policy seems to be this:

I cannot hold BRK forever. I MUST sell BRK someday to enjoy the economic benefits (cash).

However, I can hold KO, PG, JNJ, KFT, HNZ, KMB, CL and WMT including other quality-dividend paying companies forever because of the continuous, increasing streams of economic benefits (dividends) coming to me, and I don't need to sell these companies to reap and enjoy the economic benefits.

May 28 07:30 PM

[notsosmart:]

thsk is right.i have done well with good divs provided by long term drips that i exchanged for income when i retired.the stock price doesnt matter as long as the div is paid.

May 28 08:47 PM

[veryold:]

I opt for dividends. The idea that if dividends are wanted one should sell BRK is hogwash. How well did the stock do last year? If I sold I would lose thousands of dollars. He ought to reward the people who have supported him for all these years. What would he have done without us? It would be the only decent thing to do, besides supporting Gate's good works in Africa.

May 28 10:04 PM

[dick black:]

I will repeat what i have said elsewhere.....
Buffet hates poor people.
yeah, great if you got in a long time ago but if you want to get in now you have to be "wealthy" and then you'd likely only be abale to afford 1 share -there goes portfolio diversity-.

May 29 07:23 AM

[tshk1221:]

It is too early to expect any dividend from BRK since BRK's history is very short compared to other companies with consistent dividend-paying history that have more than 100 years of surviving history. For example, CL has existed for 200 years. PG, 170 years. HNZ, 140 years. KMB, 130 years and so on.

BRK must survive another 40 - 50 years from now to show to the market that it has a proven track record of surviving history. From my point of view, BRK is not that different from MSFT in terms of its speed of market capitalization during a very short period of time and relatively short business history.

However, MSFT is definitely a better choice for us because of its dividend yield of 2.6% and its firm standing as industry leader even if we have $10,000,000 to invest with.

May 29 07:10 PM

[User 347945:]

Buffet speaks out of both sides of his mouth and always talks up his horse. He does not follow his methods of purchasing stocks or the market. His benjamin Graham valuations helped him sell books. He has overpaid on many, many stocks. He is toast.

May 30 09:16 AM

[csuftitan:]

To my knowledge, Buffet hasn't sold any books. Many others have written books about his supposed methodology. He has never given any detailed information about his methodology. If you can decipher what he says in his annual reports, then you might have an idea of what his methodology truly is.

Jun 01 10:38 PM