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Rupert Hargreaves
Rupert Hargreaves
Articles (514)  | Author's Website |

Why Berkshire Hathaway Won’t Pay a Dividend

Despite having tons of cash, the company won't pay a dividend

The prevailing view of the investment community appears to be Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) will have to pay a dividend soon, as the company's cash pile nears $100 billion. Many media commentators are arguing Warren Buffett (Trades, Portfolio) is running out of opportunities and his cash balance is growing faster than he can spend it, which will ultimately force him to do something he has avoided throughout his career; paying a dividend.

I believe that as long as Buffett is in charge, the conglomerate will not pay a dividend to shareholders for several reasons.

Calculating cash

Buffett is the greatest capital allocator alive today, and he hates paying dividends (but he loves receiving them). It is easy to see why. Paying a dividend is a huge waste of money as it is taxed twice (once at the corporate level and then when distributed to investors). When investors receive the money, they have two choices, either find an investment that offers a similar return or spend the cash. Few other companies have been able to generate returns that match those of Berkshire Hathaway over the years. If they spend the cash, it is, well, gone.

Much of the argument for a Berkshire dividend seems to be based on the notion Buffett cannot find any investment opportunities in the current market. This may be true, but it does not mean there are no opportunities out there. Buffett has always made it clear he is willing to wait as long as necessary to gain control of a business at a reasonable price. In the next bear market, there will be many of these opportunities and, after years of cash conservation, Buffett will be well positioned to pick and choose his favorite.

Recent analysis by Bloomberg Gadfly shows there is a host of high-quality businesses Buffett could still buy. The magazine screened for companies worth more than $20 billion with net debt of less than two times EBITDA and returns on common equity exceeding 15% with operating margins above 10%. Companies with well-established brands and high returns include Deere & Co. (NYSE:DE), Cummins Inc. (NYSE:CMI), Rockwell Automation Inc. (NYSE:ROK) and Monsanto Co. (NYSE:MON). All have a price tag of less than $100 billion.

There is also the possibility Buffett could work with 3G Capital again to make an offer for an even larger target. Only six months ago, Berkshire and 3G backed Kraft Heinz Co. (NASDAQ:KHC) as it tabled a $143 billion offer for UK-based consumer goods giant Unilever (NYSE:UN). Over the past 12 months, Unilever has seen its market value rise by around 30%. A 20% bear market would drag the valuation down to a level where an offer of $143 billion might seem attractive.

Not an accurate reflection of liquidity

Another reason why a Berkshire dividend is unlikely is the widely quoted $100 billion cash figure is not an accurate reflection of the company's liquidity.

At the end of the second quarter, the company reported cash and cash equivalents of $20.1 billion and short-term investments in U.S. Treasury bills of $66 billion at the holding company level, a total cash balance of $86 billion. To make it up to $100 billion, commentators include the nearly $5 billion in the Railroad, Utilities and Energy division, as well as the $8.6 billion in the Finance and Financial Products division.

The cash in the railroad's division cannot really be counted toward Berkshire's war chest because these industrial divisions need capital for capital expenditures and operating expenses. Excluding this cash takes the total down to around $94.7 billion. Then there is the cash cushion of $20 billion Buffett likes to keep at all times in case of an unexpected insurance development. Stripping out this requirement leaves $74.7 billion. Other conservative estimates give Buffett a theoretical spending pot of $49.6 billion ($61.8 billion in cash linked to insurance, plus $7.9 billion from the finance and financial products minus the $20 billion cash cushion). This is still a healthy cash balance that could be used to acquire a variety of different businesses, but it is half the figure of $100 billion that is widely quoted. Acquisition targets in the region of $50 billion are plentiful. Insurance giants Prudential Financial (NYSE:PRU) and MetLife (NYSE:MET) both fall into this bracket.

Overall, Buffett's cash pile is not as big as many believe it to be and there are still plenty of potential acquisition targets out there for the "Oracle of Omaha." Do not hold your breath for a dividend anytime soon.

Disclosure: The author owns no stocks mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert was as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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