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Berkshire Hathaway Inc. (BRK.B), The Coca-Cola Company (KO), Wells Fargo & Co (WFC): Why Warren Buffett Doesn’t Pay Dividends

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Few people would accuse Warren Buffett of being hostile to shareholders of Berkshire Hathaway Inc. (NYSE:BRK.B). He’s open, forthright, and doesn’t pad his own pockets at the expense of investors. With a $100,000 salary and 21.4% stake in the largely financial conglomerate, Buffett does well when his shareholders do.

Yet, there’s one area where he comes up short. As Buffett acknowledged in his most recent letter to shareholders, “A number of Berkshire shareholders — including some of my good friends — would like Berkshire Hathaway Inc. (NYSE:BRK.B) to pay a cash dividend.”

For those of you that follow Berkshire — and, if you do, I urge you to check out our page dedicated to the company’s upcoming annual meeting by clicking here — it’ll come as no surprise that Buffett isn’t a stranger to dividends. By his own admission, he “relishes” the ones Berkshire receives from most of the stocks it owns. In 2012, its earnings included a staggering $1.1 billion in dividends from its “Big Four” investments alone: The Coca-Cola Company (NYSE:KO), Wells Fargo & Co (NYSE:WFC), International Business Machines Corp. (NYSE:IBM), andAmerican Express Company (NYSE:AXP).

Despite this, as my colleague Morgan Housel discussed at the beginning of March, Berkshire Hathaway Inc. (NYSE:BRK.B) has only paid a dividend once, and that was more than 40 years ago. “I must have been in the bathroom when the decision was made,” Buffett is often quoted as saying.

Berkshire Hathaway Inc.Buffett believes, and with good reason, that shareholders will benefit more from Berkshire’s retention and reinvestment of the funds than they would if the company paid them out. His letter offered competing hypothetical examples of the impact on a shareholder’s net worth under both scenarios. By paying dividends, he estimates that he’d reduce the company’s compound annual growth rate by 4%.

So that’s the end of that, right? Well, not so fast.

While there’s little question that Buffett is arguably the world’s best capital allocator, as I noted in an article about seven reasons to sell Berkshire, he’s not going to be around forever. And when he’s no longer in control of Berkshire Hathaway Inc. (NYSE:BRK.B), it seems unlikely that his replacement will be able to completely fill his shoes.

One of the things Buffett is known for is “deal flow.” When companies like Bank of America Corp (NYSE:BAC) or Goldman Sachs Group, Inc. (NYSE:GS) need a stamp of approval, as they both have over the last few years, they go to Buffett (and notably, not Berkshire) — though, to be fair, B of A’s CEO Brian Moynihan said that Buffett came to him.

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