I must admit I couldn't resist the temptation: The other day, I bought a few Berkshire Class B (NYSE:BRK.B) shares, before the split. I am happy I did, because I am already up more than 7%.
Berkshire has always been on my watchlist, but I confess I decided to buy on speculation that Berkshire may be soon included in the S&P 500; when that happens, many funds often will start buying the stock in order to correctly track the index, and that alone is likely to send the price higher. Moreover, Buffett himself recently stated that Berkshire is undervalued and trading at its lowest price-to-book ratio in years.
I read Buffett's comments concerning the price action of the B shares after the split, and he was somewhat disappointed:
We don't want any day traders. And we get very, very few of them in the end. We want to get the same kind of shareholders that we've attracted in the past, we want to get people who look at buying a share of Berkshire... that they intend to hold forever... There's been a little more action than is ideal today.
Well, sorry Warren, but now that the stock price is in the double digits, I guess you had better get used to day trading in Berkshire shares now.
Buffett and Berkshire vice chairman Charlie Munger have always said they would not pay a dividend because they could achieve a higher return for their shareholders by reinvesting all the profits by acquiring new businesses or buying undervalued shares in publicly-traded companies. This has always been the case, and Buffett and Munger are now regarded as oracles for what they achieved in the past 40 years. On the other hand, Buffett has recently stated that "we've found it hard to find significantly undervalued stocks," and that is indeed the case with the recent acquisition of Burlington Northern (BNI).
Berkshire is now a huge diversified company with a $150 billion market cap, and though it can still double from here, it would take quite a long time. Moreover, by not paying a dividend, Buffett is ignoring one of his mentors: John Burr Williams, one of the fathers of value investing, wrote in 1937:
A cow for her milk, a hen for her eggs, and a stock, by heck, for her dividends... If earnings not paid out in dividends are all successfully reinvested, then these earnings should produce dividends later; if not, then they are money lost. In short, a stock is worth only what you can get out of it.
This means if you hold stock in a company that does not pay dividends, the only way you can get value out of it is by buying and selling its stock on the open market. With Berkshire's shares now quoted in the double digits, it is a welcome sign to day traders and speculators - exactly the kind of people Buffett has always tried to keep at arm's length.
A Berkshire payout ratio in the 30%-50% range would provide a decent income, welcome more long-term investors and help reduce volatility while not significantly hindering the company's acquisition power. I would even suggest a dividend reinvestment plan for those who do not elect to receive a cash dividend.
A change in Berkshire's dividend policy would prove the crowning of Buffett's work and a long awaited reward to all its shareholders.
Disclosure: Long BRK.B