Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Buffett: You Want a Dividend? Go Make Your Own – Berkshire Hathaway, Inc. (BRK.B)

Page 1 of 2

Warren BuffettBerkshire Hathaway, Inc. (NYSE:BRK.B) has paid out a dividend just once under Warren Buffett’s watch, a $0.10-per-share payout in 1967. Buffett later joked, “I must have been in the bathroom when the decision was made.”

But no one’s joking anymore. “A number of Berkshire shareholders — including some of my good friends — would like Berkshire to pay a cash dividend,” Buffett said in his latest letter to shareholders.

Who’s going to win this battle?

In 1998, a student at the University of Florida asked Buffett about dividends. Buffett repeated the question for the crowd. “The question is about evaluating Berkshire Hathaway, Inc. (NYSE:BRK.B) when it doesn’t pay any dividends,” he said. “And it won’t pay dividends, either. That’s a promise I can keep. All you get with Berkshire stock is that you can stick it in your safe deposit box, and every year you take it out and fondle it. “

So there’s that.

But the question keeps popping up. It has become almost ritualistic for a shareholder to ask Warren to pay a dividend at its annual shareholder meeting in Omaha.

In the latest letter to shareholders, Buffett brought up a great rebuttal. You want a dividend? Make one yourself by selling some of your fondled stock certificates. You get the cash you wanted, and it’s far more efficient than Berkshire Hathaway, Inc. (NYSE:BRK.B) paying an actual dividend.

Buffett used an example of a small business with two shareholders. Imagine a business worth $2 million and earning $240,000 a year. Shares are worth 125% of book value on the open market. Profits can be reinvested back into the business and earn 12% per year, but the two owners want some cash to pay their bills, and opt to take one-third of the company’s profits out as a dividend every year.

After 10 years the two owners would own shares worth $2.7 million each, and pull in dividends worth $86,000 per year. “And we would live happily ever after — with dividends and the value of our stock continuing to grow at 8% annually,” Buffett writes.

But another option is available to the two owners:

Under this scenario, we would leave all earnings in the company and each sell 3.2% of our shares annually. Since the shares would be sold at 125% of book value, this approach would produce the same $40,000 of cash initially, a sum that would grow annually. Call this option the “sell-off” approach.

Under this “sell-off” scenario, the net worth of our company increases to $6,211,696 after ten years ($2 million compounded at 12%). Because we would be selling shares each year, our percentage ownership would have declined, and, after ten years, we would each own 36.12% of the business. Even so, your share of the net worth of the company at that time would be $2,243,540. And, remember, every dollar of net worth attributable to each of us can be sold for $1.25. Therefore, the market value of your remaining shares would be $2,804,425, about 4% greater than the value of your shares if we had followed the dividend approach.

Moreover, your annual cash receipts from the sell-off policy would now be running 4% more than you would have received under the dividend scenario. Voila! — you would have both more cash to spend annually and more capital value.

Page 1 of 2
Loading Comments...