Warren Buffett has a love-hate relationship with dividends: He
loves collecting them, but hates paying them.
The billionaire investor’s holding
company, Berkshire
Hathaway Inc.,(BRK.B-N85.050.120.14%) is
stuffed with dividend-paying stalwarts such as Coca-Cola Co.,
Johnson & Johnson, and Procter &
Gamble Co. Many of Berkshire’s biggest holdings are so-called
dividend aristocrats, which have paid rising dividends for at least
25 consecutive years.
Yet Berkshire itself is a model of stinginess, having never paid a
penny in dividends to shareholders since Mr. Buffett took control
in the mid-1960s.
Is that about to change? Some Buffett watchers think so, pointing
to the enormous sums of cash piling up in Berkshire’s coffers and
the Oracle of Omaha’s advancing age. But Mr. Buffett’s public
comments over the years suggests a dividend is highly unlikely, at
least while he is at the helm.
The dividend speculation was fuelled by a recent Barron’s article,
which said Berkshire’s core insurance operations could be sitting
on nearly $50-billion (U.S.) in cash by the end of 2011. What’s
more, Berkshire’s operating profit is poised to hit record levels
this year, helped by the 2009 acquisition of Burlington Northern
Santa Fe Corp. and some savvy deals during the financial
crisis.
“The flood of cash could prompt Berkshire to finally start paying a
cash dividend in the next 12 to 18 months, particularly if the
80-year-old Buffett is unable to find what he calls an ‘elephant’,
or large acquisition,” Barron’s said.
Paying a “modest” dividend, likely yielding less than 2 per cent,
would also “take some pressure off [Mr. Buffett’s] successors to
invest the company’s profits.”
Berkshire's “B” shares climbed to $83.03 from $80.45 over the past
four trading sessions, partly in response to the rumours.
Radical Change Afoot?
If Berkshire did start paying a dividend, it would mark a radical
departure in philosophy. Mr. Buffett has always maintained that as
long as he can reinvest his cash at a reasonable rate of return,
it’s better to retain the money.
“We don't pay dividends because we think we can turn every dollar
we make into more than a dollar in market value,” he told
Berkshire’s annual meeting in 1997. “If we come to the conclusion
that we can't do that, we should distribute it to you.”
He conveyed a similar message at Berkshire’s 2008 annual meeting,
where he remarked: “The test on dividends is, ‘can you create more
than $1 of value with the one you retain?’ … We hope to move the
capital to a place where it will be worth $1.20.”
Given such pronouncements, Buffett watchers are skeptical that a
dividend is in the cards.
“I’ve read pretty much every book on Buffett that’s out there. I
read all the annual reports and pretty much every piece of
information, every speech, whatever I could find,” says Pavel
Begun, a partner with 3G Capital Management in Toronto.
His conclusion? “I’d be surprised if he pays a dividend. I will be
surprised simply because if you look at what he’s said over the
years, it leads me to believe that he still thinks that it’s
reasonable to expect them to find opportunities to invest back in
the business at a good rate of return as opposed to paying it out
to shareholders.”
Buyback Possible
If Mr. Buffett wanted to return cash to shareholders, it’s possible
he might buy back Berkshire shares, Mr. Begun says. But he would do
that only if the stock was trading well below its “intrinsic
value.” Mr. Buffett contemplated doing a buyback in 2000, but
“after this intention was announced, the stock went higher and the
opportunity was gone,” Mr. Begun says.
At some point, Berkshire Hathaway may get so big that it can’t find
enough good opportunities to put its cash to work. Or Mr. Buffett’s
successors may lack his expertise at finding attractive
investments. At that point, a dividend may make sense, but we’re
not there yet, Mr. Begun says.
Tony Demarin, president of BCV Asset Management in Winnipeg, is
equally skeptical. Initiating a dividend would signal that Mr.
Buffett can no longer work his magic, which in turn might clobber
Berkshire’s stock because investors would lower their expectations
for the company’s earnings growth.
Even after the market’s double-digit gains over the past two years,
“I don’t see why he wouldn’t find value in today’s marketplace,” he
says. “He always believes there’s undervalued securities somewhere.
He has that ability. That’s what he does for a living. He’s not in
the business of placating short-term investors.”
Meyer Shields, an analyst with Stifel Nicolaus, also threw cold
water on the notion of a dividend.
If Berkshire initiates a dividend, “we expect investors to
interpret that as an admission that the company simply cannot
replicate its past track record of earnings and book value growth …
clearly warranting a below-historical-average valuation,” he wrote
in a note to clients.
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