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Bill Freehling
Bill Freehling

Warren Buffett Hints At Future Dividends For Berkshire Shareholders

May 02, 2010 | About:
Warren Buffett hinted this weekend that Berkshire Hathaway will have to pay a dividend in the future.

Late in the annual shareholders meeting Saturday, according to an excellent blow-by-blow account by The Wall Street Journal, Buffett was asked what question he was surprised not to have received during the nearly six-hour Q&A session.

According to the WSJ account, Buffett said he'd ask if Berkshire will be able to effectively reinvest the cash it generates with its array of successful businesses. Buffett then said that "there will come a time when we cannot intelligently use 100% of the capital we generate internally."

"There is a limit," Buffett reportedly said. "There comes a point where the numbers get too big."

Here is what reporter Erik Holm wrote about that answer:

"That's the clearest I've ever heard him say that eventually, at some point in the future, Berkshire will perhaps pay a dividend."

That wouldn't be a revelation for most companies whose market caps are as big as Berkshire's and who generate so much cash. But Berkshire, under Buffett's leadership, has famously declined to issue dividends for more than four decades, choosing instead to keep the cash and buy additional investments.

Though he didn't come right out and say it, Buffett's response indicates that policy could change going forward if Berkshire continues to generate more and more cash (which is a nice problem to have).

Paying a dividend could also provide some nice cash for the Gates Foundation, which would allow them to generate cash for charity work from the Berkshire shares without having to sell (Buffett reportedly said this weekend that the foundation's regular sales aren't affecting the stock price).

Berkshire pundits and shareholders have mixed opinions on the dividend matter.

One side defends Buffett's policies and cites the results he's obtained over the past half-century. This side also points out that paying dividends isn't tax-friendly, and this could be even more the case should tax rates on dividends go up, as seems likely. They say investors looking for income should just choose another stock.

The other side believes that Buffett is holding back the stock price by not paying a dividend. That policy requires shareholders who need income from their Berkshire stock to simply sell (which is now much easier to do in parcels since the B shares split 50 for 1), and many don't want to do that.

I did a poll on this topic last summer; of the 422 voters, 58 percent said they think Berkshire should pay a dividend.

The pro-dividend crowd probably shouldn't get their hopes up too high. Buffett also said at the meeting, according to the various media reports, that he is now willing to do a $10 billion deal for Berkshire, and that he is starting to look at India as a possible hunting ground.

That kind of big-game target requires plenty of ammunition, and Buffett will probably keep Berkshire's cash pile accumulating for the foreseeable future--at least as long as he's at the helm.

After all, paying a dividend while Buffett is in charge will mean the company's biggest shareholder, himself, will be receiving the largest chunk of the firm's largesse.

About the author:

Bill Freehling
Bill Freehling
For gurufocus.com
[email protected]

Rating: 3.4/5 (16 votes)


Kfh227 - 8 years ago    Report SPAM
Erik Holm must not know anything about Berkshire. This is what Buffett has said for years. As the company gets bigger and bigger, growth will get slower and slower. At some point it will slow to a point that it will have to pay a dividend. The idea being that shareholders will be able to better reinvest the money than Berkshire can.

In he past, he also said something along the lines of "when growth is below 15% annually". I forget the exact wording but that was the gist.

Oldye - 8 years ago    Report SPAM
Mr. Frehling,

You are of course entitled to your opinion but I don't think you should be writing articles using media outlets as sources even on the internet there has to be some level of journalism. I was at the meeting and if you listened to his comments in context you would know that Berkshire will never pay a dividend as long as Warren Buffett is chairman and probably won't for decades after. Berkshire is a senior compounding machine and if they can create a $ of intrinsic value for every $ they invest they will continue to do so.
Sivaram - 8 years ago    Report SPAM

I think the big question for Berkshire shareholders and potential investors is not when it will pay out a dividend but whether the market will de-rate the company if it starts paying out a dividend. Pretty much everyone who buys Berkshire shares has been doing so for capital gains. Since capital gains has been very strong over the decades, not to mention the fact that taxes are lower, it remains to be seen if the market will sell off Berkshire if it starts paying out dividends.

The issue I raised is way more important than whether Berkshire will pay a divend or when it will. After all, if the market doesn't lower the multiple on Berkshire if a dividend was paid out, then the value of Berkshire will stay the same whether it pays a dividend or not.

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