What If Berkshire Hathaway Paid a Dividend?

An interesting side effect of investors' recent love affair with dividend stocks is that one of my very favorite stocks, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , leaves many dividend-chasers cold because Warren Buffett & Co. hang onto all of the company's cash.

As a fan of dividends myself, Berkshire is one of the few companies I'm willing to give a pass when it comes to payout. Why? Simple, because I believe that Warren Buffett can find great opportunities -- in many cases, opportunities that I wouldn't have access to, like a special Goldman Sachs preferred stock -- to reinvest the money. And it's not like Buffett is against dividends -- Berkshire's public-stock portfolio is top-heavy with dividend payers like Coca-Cola, IBM, and Wells Fargo.

Could it happen?
I don't think that I'm going out on a limb if I say that it's unlikely we'll see a Berkshire dividend as long as Buffett is running the show. And since Buffett is a key asset for the company, I'm also not eager to rush to the day that he's no longer pulling Berkshire's investment levers.

But we're long-term investors, right? And since Buffett's no spring chicken, we do have to consider the fact that one day, Berkshire will be headed up by somebody else. And when that happens, is it possible that we (I'm a shareholder, after all) will see a dividend suddenly appear?

Crazier things have happened.

Picturing the impossible
As long as we're toying with the idea of a Berkshire dividend at all, we might as well try to figure out what such a dividend would look like.

For different types of businesses, there are different levels of dividend payout that make sense. Businesses in slow-or-no growth industries, like telecom for instance, tend to pay out a lot more of their earnings than an industry like health care, where there may be more growth-investment opportunities.

Of course, figuring out the right payout is easier said than done for Berkshire because it's a broad collection of businesses, so it's hard to look at one particularl industry and assume that Berkshire's dividend would line up perfectly.

What we can do, though, is break up the business into its component parts. These are rough approximations based on pre-tax income.

  • Insurance (25%)
  • Railroad (25%)
  • Utility (15%)
  • Other (35%)

The "other" category is a pretty big catch-all. It includes a high number of consumer-related businesses -- Benjamin Moore, See's Candies, Nebraska Furniture Mart, Fruit of the Loom, Helzberg Diamonds, International Dairy Queen, etc. -- as well as the big industrial Marmon and food distributor McLane.

Stacking up Berkshire
Now that we know what component businesses broadly make up Berkshire, let's take a look at how companies in those industries handle dividends.

Insurance

Company Type of Insurance Average 5-Year Payout Ratio
Allstate Home and auto 46.1%*
Progressive Auto 13.5%*
ACE Limited Specialty insurance and reinsurance 21.6%
Swiss Re Reinsurance 26.2%*
Average   26.9%

Source: S&P Capital IQ, *Excludes 2008.

Railroad

Company Operating Area Average 5-Year Payout Ratio
CSX (NYSE: CSX  ) U.S. Northeast 24.1%
Norfolk Southern U.S. Northeast 33.1%
Union Pacific Trans-U.S. 23.2%
Average   26.8%

Source: S&P Capital IQ.

Utility

Company Operating Area Average 5-Year Payout Ratio
Consolidated Edison (NYSE: ED  ) New York 63.0%
PG&E California 56.4%
Public Service Enterprise Group Northeastern and mid-Atlantic U.S. 47.0%
Progress Energy North Carolina, South Carolina, Florida 100.9%
Average   66.8%

Source: S&P Capital IQ.

Other

Company Business Average 5-Year Payout Ratio
Illinois Tool Works Industrial products 41.0%
Sysco (NYSE: SYY  ) Food distribution 50.2%
Williams-Sonoma Home goods 37.5%*
Hershey Candy and gum 73.3%
Nike Clothing 26.4%
Average   45.7%

Source: S&P Capital IQ. *Excludes 2008.

Adding it all up
If we assume that Berkshire sticks to these rough industry averages in setting its dividend policy, we could expect that it would likely pay out something like 40% of its earnings.

So what would that mean practically? If we average out Berkshire's earnings over the past five years -- excluding the finance-meltdown-related dip in 2008 -- we get $11.5 billion, or roughly $4.63 per share on a B-share basis. If the company paid out 40% of those earnings, we'd be looking at an annual dividend of roughly $1.85 per share, for a yield of 2.3%, based on today's stock price.

Obviously, were Berkshire to introduce a dividend, it could put in place any policy it wants -- and that policy might be substantially more or less generous than what I'm assuming here. But based on the business mix at Berkshire, I think this is a pretty good target for what a Berkshire dividend would look like.

But alas, no dividend today
While the above may be a fun thought exercise, the bottom line is that Berkshire doesn't pay a dividend today. And there's no good reason to believe that the initiation of a dividend is right around the corner.

Maybe you're like me and you're willing to give Berkshire a pass on the no-dividend policy. If that's the case, I think there are plenty of good reasons to own Buffett's baby.

But if the lack of a dividend is a show-stopper for you, not to worry, there are plenty of great stocks out there that pay a dividend right now. And you can find a bunch of them in The Motley Fool's special report "Secure Your Future With 11 Rock-Solid Dividend Stocks." Grab a free copy by clicking here.

The Motley Fool owns shares of Coca-Cola, International Business Machines, Berkshire Hathaway, and Wells Fargo. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group, Williams-Sonoma, Illinois Tool Works, Sysco, Berkshire Hathaway, Nike, and Coca-Cola. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Sysco and Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On February 22, 2012, at 5:03 PM, karlm1 wrote:

    Nice article and good work., Berkshire Hathaway is my largest holding and the only one that does not pay a dividend. I always wondered what a dividend might look like if and when they paid one. He has said that when the company underperforms the S&P for a consecutive 5 year period they would start paying a dividend. With retirement about 5 years away I figure I will just have to make my own home made dividend out of it.

  • Report this Comment On February 22, 2012, at 6:37 PM, DoctorLewis4 wrote:

    Yes - good article! At last year's meeting both Warren and Charlie addressed the dividend issue. All us long term holders know that Warren and Charlie can do better with that money then we can. Charlie said if you need a payout that badly then sell a few shares. I agree.

  • Report this Comment On February 23, 2012, at 12:02 AM, PhilipSwanson wrote:

    I owned BRK-B for the last 4 yrs. It cost me 11% to park my money there, so I finally sold it. Not much of an investment.

  • Report this Comment On February 23, 2012, at 12:26 PM, GregoryPaul wrote:

    I bought BRK in 1979; one of the most significant elements to this particular investments is that I have never paid one penny in tax on the investment. Every dollar ever earned has been reinvested. My daughter works overseas and does not qualify for a IRA or other tax sheltered account, I have been putting a portion of her money into BRK for just this reason.

  • Report this Comment On February 23, 2012, at 4:02 PM, pcodawilliam wrote:

    I look at it this way. berkshire pays the taxes on dividends at probably a lower rate than the individual investor, and reinvests them, and the shareholders get the advantage of greater unrealized capital gains, which are taxfreee until realized. am I missing something?

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