For more than 45 years, Berkshire Hathaway (symbol
) has declined to pay dividends. A vocal group of shareholders
would like that to change. But chief executive officer Warren
Buffett has repeatedly expressed his views on the topic: No dice.
"He feels he can earn a higher return for shareholders if he
invests the company's retained earnings, rather than if the
shareholders did it themselves," says David Kass, a finance
professor at the Robert H. Smith School of Business at the
University of Maryland in College Park.
Kass, a Berkshire shareholder who regularly attends the
company's annual meeting (often with students in tow), will have a
prime seat as the matter comes to a vote at this year's annual
meeting, scheduled for May 3. It is virtually certain that
Berkshire shareholders will reject the resolution.
Berkshire unquestionably has the means to pay a dividend.
According to the 2013 annual report, about 10% of the company's
assets, or $48.2 billion, is made up of cash. But the Oracle of
Omaha has said he would pay a dividend only if he could not find
investing opportunities that were more attractive, something that
could happen if stocks became grossly overpriced. But even when the
stock market reached extraordinarily high levels, as it did during
the technology-fueled growth-stock boom of the late 1990s, Buffett
declined to return cash to shareholders. "Part of his success in
investing is his patience," Kass says.
Buffett also needs ample cash in order to make acquisitions that
are large enough for Berkshire, which is one of the biggest
companies in the world by market value ($311 billion as of April
16). In 2013, the company laid out nearly $18 billion to acquire a
major stake in H. J. Heinz, the ketchup maker, and to purchase all
of NV Energy, a Las Vegas-based utility. In 2009, Berkshire
acquired railroad Burlington Northern Santa Fe in a transaction
valued at $44 billion. "If he turned the cash into a dividend,
Buffett wouldn't be able to find the next Burlington Northern
deal," says Robert Miles, who has written three books on Buffett
and Berkshire Hathaway and created a graduate-level course, "The
Genius of Warren Buffett," which he teaches at the University of
Nebraska-Omaha College of Business Administration.
Buffett said as much in his letter to shareholders in
Berkshire's 2012 annual report: "I have made plenty of mistakes in
acquisitions and will make more. Overall, however, our record is
satisfactory, which means that our shareholders are far wealthier
today than they would be if the funds we used for acquisitions had
instead been devoted to share repurchases or dividends." Over the
past ten years through April 15, Berkshire's Class B shares
returned 7.2% annualized, precisely matching Standard & Poor's
500-stock index. But the company's long-term record is superb.
Since Buffett took over Berkshire in 1965, the company's Class A
shares have returned an astounding 20.7% annualized, more than
double the return of the S&P 500. (The Class B shares were
created in 1996.)
Buffett also argues that dividends are less tax-efficient than
reinvesting profits in his company. That's because Uncle Sam taxes
a company's profits before it pays dividends and then claims a
share of the dividends unless investors hold stocks in tax-favored
accounts, such as an IRA. Investors who need income, Buffett says,
are better off simply selling some of their shares (assuming
they've held the stock for more than a year and qualify for
favorable long-term capital-gains treatment).
But Buffett may have another trick up his sleeve for returning
cash to shareholders. In 2011, Berkshire's board of directors
approved a plan that allows the company to buy back shares whenever
the stock price falls below 120% of Berkshire's book value (assets
minus liabilities). At Berkshire's current price, the stock is
trading for well above book value ($89.98 per Class B share).
Berkshire bought $1.3 billion worth of its shares in 2012 and none
But if you own Berkshire stock or plan to invest in the company,
don't count on getting a dividend soon. The more likely scenario is
that the company will begin issuing dividends after Buffett, 83,
and Berkshire vice-chairman Charlie Munger, 90, depart from the
scene. "I do see a time in the future, after Buffett retires, when
Berkshire will consider paying a dividend to attract and keep large
institutional shareholders," Miles says. In the meantime, you'll
just have to be satisfied with capital appreciation from