What Would A Berkshire Dividend Look Like?

| About: Berkshire Hathaway (BRK.B)
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Warren Buffet finally admitted that sitting on loads of cash over a long period of time is useless, and added that the idea of returning value to investors in shape of dividends will be discussed in the next annual meeting of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). This is great news for the investors of the company; however we don't know what a Berkshire Dividend would look like at the moment.

Because the company is a composite of many smaller companies (e.g., Geico) and parts of many other companies [e.g., Coca Cola (NYSE:KO), American Express (NYSE:AXP), P&G (NYSE:PG)], it is really difficult to calculate the exact value of Berkshire Hathaway. Many people -including me- argue that the company is deeply undervalued by the market as it is one of the most successful companies in the history with a lot of potential for future growth. Still, many people are reluctant about buying this company because they don't believe there are other people willing to pay more for it. After all, a company is worth as much as people are willing to pay for it in the market. Issuing dividends is definitely a good way to return value to investors who have faith in the company.

If we look at Berkshire's balance sheet, we see that the company collected $4.7 billion in dividends, interest and other income from its investments in 2011. In 2010, this number was $5.2 billion and it averaged $5.3 billion in the prior 3 years. Berkshire's market value is $205 billion, which means that if the company was to pass all the dividends and other income it receives from its holdings to its stockholders, the yield would be around 2.43%.

If we go by the company's overall earnings, it earned $3.46 per share (Class B shares) in 2009, $5.29 per share in 2010 and $4.14 per share in 2011. This averages out to $4.30 per share. If the company was to pass 30% of these earnings to investors, we would be looking at a dividend rate of $1.29 per Class B share, which would translate into a yield of 1.57%.

While the dividend rate is not very high, it's a good start. Just the act of issuing dividends alone will attract many new investors and many new funds that have a habit of not investing in stocks that don't issue dividends.

As a portfolio company, Berkshire buys and sells a lot of stocks, resulting in a lot of one-time gains and (rarely) one-time losses. I don't expect the company to distribute its capital gains in dividends. This is very unlikely, as the company's culture is growth oriented, and capital gains are always used for further growth. The company also likes to have a lot of cash on the side in case good valuations come up due to economical conditions. This fits well with Warren Buffet's famous saying: "Be fearful when everyone else is greedy and be greedy when everyone else is fearful." Berkshire will always have some cash on the side for times when everyone else is fearful.

In conclusion, when and if Berkshire starts paying dividends, the rate will not be very high, however it will be a good step forward as it will attract a lot of dividend investors into buying this stock.

Disclosure: I am long BRK.B.