When Warren Buffett (Trades, Portfolio)’s annual report comes out next year, it’s almost certain that his book value will outpace the growth of the Standard & Poor's 500, which has been flat on the year and providing investors just 2.6% in dividends. Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) book value has risen close to 5%.
As for the stock holdings, Berkshire’s performance has been like many elite hedge fund managers – poor. The Oracle of Omaha has seen two of his largest investments, American Express (AXP, Financial) and IBM (IBM, Financial), fall by 24% and 13%. This will be the worst year since 2009 for both A and B shares of the stock as well.
So why not start paying out dividends next year?
The company has $60 billion in total cash and a portfolio of stocks worth $127 billion, generates another $23 billion a year in net income and has more than 100 financially stable businesses to support a healthy yield. More importantly, Buffett is no longer able to find big acquisitions or big investments within his circle of competence to move the book value 15% a year. It will never see those types of growth rates again.
Whether you have followed Buffett or are an investor in Berkshire, you already know this. However, if you are looking for stable places to put your money, doesn’t it make more sense to earn dividends in lieu of high growth? It’s a hard thing for someone with a long track record of success to step back and move in a completely new direction. Yet, while the majority of stocks in the Berkshire portfolio pay significant dividends to the company, the company pays out nothing to its shareholders. It’s about time it started doing just that – paying investors dividends.
Even if the company paid out 50% of its earnings as dividends ($11 billion, a 3% yield), it would still be growing cash faster than it can spend. Of all the problems to have, this is the best one for a business. The company could make the dividend only accessible to one class of its shares, but any dividend that Buffett received would put him into a much higher realized earnings bracket and could mean paying taxes in the hundreds of millions annually, on a 3% yield. This seems like something he would be happy to do.
Again, the reason for the dividend is the company has run out of options within its circle of competence based on its growth by acquisition strategy. If it were willing to diversify into other areas of the market like health care, it would have a great opportunity in Gilead Sciences (GILD, Financial) right now at 10 times earnings for $146 billion. Or Buffett could just buy the rest of American Express for 25% less than last year, but there has to be some regulation on credit card services mixed with insurance companies. Or bet big on America and buy Caterpillar (CAT, Financial) or Deere (DE, Financial).
I could go on, but the problem he faces as a steward of Berkshire is that buying anything will only add cash flow back that needs to be reallocated again at higher capital rates. The next mega acquisition will likely just add 10% to 30% more cash per year to keep buying more companies.
At some point a dividend will be necessary.
My question is – why not just go ahead and make it 2016?
Disclosure: I have no position in the company.
