Why Warren Buffett Doesn't Pay Dividends

Few people would accuse Warren Buffett of being hostile to shareholders of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . He's open, forthright, and doesn't pad his own pockets at the expense of investors. With a $100,000 salary and 21.4% stake in the largely financial conglomerate, Buffett does well when his shareholders do.

Yet, there's one area where he comes up short. As Buffett acknowledged in his most recent letter to shareholders, "A number of Berkshire shareholders -- including some of my good friends -- would like Berkshire to pay a cash dividend."

For those of you that follow Berkshire -- and, if you do, I urge you to check out our page dedicated to the company's upcoming annual meeting by clicking here -- it'll come as no surprise that Buffett isn't a stranger to dividends. By his own admission, he "relishes" the ones Berkshire receives from most of the stocks it owns. In 2012, its earnings included a staggering $1.1 billion in dividends from its "Big Four" investments alone: Coca-Cola, Wells Fargo, IBM, and American Express.

Despite this, as my colleague Morgan Housel discussed at the beginning of March, Berkshire has only paid a dividend once, and that was more than 40 years ago. "I must have been in the bathroom when the decision was made," Buffett is often quoted as saying.

Buffett believes, and with good reason, that shareholders will benefit more from Berkshire's retention and reinvestment of the funds than they would if the company paid them out. His letter offered competing hypothetical examples of the impact on a shareholder's net worth under both scenarios. By paying dividends, he estimates that he'd reduce the company's compound annual growth rate by 4%.

So that's the end of that, right? Well, not so fast.

While there's little question that Buffett is arguably the world's best capital allocator, as I noted in an article about seven reasons to sell Berkshire, he's not going to be around forever. And when he's no longer in control of Berkshire, it seems unlikely that his replacement will be able to completely fill his shoes.

One of the things Buffett is known for is "deal flow." When companies like Bank of America (NYSE: BAC  ) or Goldman Sachs (NYSE: GS  ) need a stamp of approval, as they both have over the last few years, they go to Buffett (and notably, not Berkshire) -- though, to be fair, B of A's CEO Brian Moynihan said that Buffett came to him.

And what does Berkshire get in return? Money, that's what, and lots of it.

For its $5 billion investment in Goldman, which spanned a mere four and a half years, Berkshire took home $3.2 billion in profit. And its equally sized $5 billion investment in B of A could end up being even more lucrative given the accompanying warrants to purchase 700 million shares of the bank for $7.14 a share. At today's price, that equates to a profit of $3.7 billion; excluding the dividend payments Berkshire has and continues to receive on its preferred shares.

The point is that, while Berkshire may very well carry on being great, there's little reason to believe that it can be as great without Buffett as it has been with him. And it's for this reason that Buffett's anti-dividend policy may need to be updated while he's still at the helm. 

Heading to Omaha
On May 4, Berkshire Hathaway will be holding its epic annual meeting in Omaha, and the Fool will be there to bring you everything you need to know from this "Woodstock for Capitalists." Simply click here to follow along with all of the Fool's coverage.

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  • Report this Comment On April 30, 2013, at 11:47 AM, cfischer99 wrote:

    I've been wondering about something the past couple of years. Has Buffet made some decisions on capital allocation based more on the possibilities presented by the market, or to make it easier for his successors?

    Some of his decisions, like the railroad purchase, seemed to be as much about reducing the cash pile as it was about using it effectively. This saves Todd & Ted a bit of grief from the armchair analysts who will insist, when Warren B is no longer with us, that the rules have permanently changed and Berkshire-Hathaway must immediately do something bold and innovative (read: stupid) with the big pile of cash.

    On the other hand, the more diverse things Warren does with Berkshire-Hathaway, the more options his successors have to do the same without encountering opposition from a knee-jerk crowd who will consider Warren's playbook as set-in-stone.

    I'll be reading the transcripts from the Q&A at the Berkshire-Hathaway meeting this weekend with great interest.

  • Report this Comment On April 30, 2013, at 4:50 PM, mdk0611 wrote:

    1. Given the amount of time the Keystone pipeline decision has been delayed, I think there was a lot more to the railroad purchase than reducing cash.

    2. As Berkshire gets a 70% dividends received deduction at the corporate level that the individual taxpayer does not, there could also be tax reasons behind the decision.

  • Report this Comment On September 07, 2013, at 5:00 PM, jaybird43 wrote:

    As someone in the London branch of TMF says, I prefer to get the dividends and let me be the judge of whatto do with them. As such I will never own Berkshire.

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