Warren Buffett's Brilliant Plan to Make His Investors Richer

Berkshire Hathaway has a bright future as a "cannibal," not a mere dividend-payer.

May 12, 2014 at 7:45AM


I have a hunch: Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) shareholders are some of the smartest investors out there.

Last weekend, Berkshire shareholders shot down a proposal to pay a dividend by a 30-to-1 margin. Shareholders are clearly content with business as usual. A dividend from Berkshire looks as probable as a human colony on Mars by 2015.

Shocked? Some are. Berkshire's own shareholders shouldn't be. There is absolutely no reason for Berkshire Hathaway to pay a dividend.

Why a dividend would be a mistake
Let's avoid the obvious: Buffett is one of the best capital allocators on the planet. Taking money out of his hands is like taking a bat from Babe Ruth. You just don't do it.

But the reason for keeping cash at Berkshire goes beyond Buffett. It comes down to compounding.

I went back to Berkshire's portfolio and looked through the financials of just some of Berkshire's holdings. As I went through, I found a very unsurprising, very "Buffett," commonality.

Take a look at this chart of diluted shares outstanding for five of Berkshire's stock holdings:


Notice something? All lines go down. In most cases, the plotted points move lower and lower in every single year. In every case, the diluted share count as of the end of 2013 is lower than in 2004.

These five companies are what Charlie Munger would call cannibals -- companies that slowly "eat" themselves by buying back stock.

The future for Berkshire
Berkshire Hathaway shareholders understand the company's future looks a lot like the above chart. As Berkshire Hathaway grows larger, spits off more cash, and has fewer reinvestment opportunities, it has one big opportunity ahead of itself: Growing by getting smaller.

You see, dividends are great. Everyone loves a little cash incentive to continue holding a stock. But for the long-term investor, buybacks can be a much, much better use of cash. Some of the best-performing stocks in history -- from Teledyne to Wal-Mart -- have been routine and frequent financial alchemists. They've created tremendous value by shrinking their shareholder base.

Buffett and Munger have long understood that buybacks can create value for investors. You see this in Berkshire's own stock portfolio.

And although buybacks have a bad reputation for being poorly timed, or worse, hiding excessive compensation, the companies that do it right deliver outsized returns to investors.

Dividends, and their resulting taxes, are the price you pay for management you do not trust with a company's cash. Berkshire's record is remarkable. Its buyback policy is undoubtedly one of the most transparent in corporate history. To deny it a future of cannibalism would be to deny it a massive opportunity to grow shareholder wealth in the most tax-efficient way possible -- financial sacrilege.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. 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. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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