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.
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