Berkshire Hathaway
Dividend Matters

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By Socrateese
December 17, 2003

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Some random thoughts on dividends:

1) There is no single "correct" answer regarding dividends. Where or not it is "better" for Berkshire to pay a dividend will differ for each investor according to his investment goals.

2) Nevertheless, any given investor may be mistaken as to what dividend policy would most successfully accomplish his goal.

3) Each and every one of us who has committed capital to this company is a partial owner and has every right to have and express an opinion as to dividend policy.

4) The reasonable course is for the majority (in terms of number of shares owned) to determine the course. (It follows that, given that Buffett has built this company and owns an enormous number of shares, he actually should have the greatest (although not absolute) input into the policy.)

5) Everyone who suggests that people who want a dividend simply should sell some of their shares to manufacturer a "dividend" are missing a very crucial point about dividends. The stability of a dividend will be determined solely by the stability of the cash flows of a business; whereas the stock price--and therefore the proceed from share sales--can very widely. For example, take a retired Berkshire investor who may have the vast majority of their net worth invested here and is very dependent on Berkshire for their income. A dividend would be a very secure cash stream on which they could depend, regardless of market conditions. However, imagine a scenario (huge stock market crash, death of Buffett, etc.), which severely depressed Berkshire share price for a few years. This could be very harmful to this investor if they had to sell shares during this time. Now for a young investor who is only saving for the future and not having to spend any money from Berkshire, they can ride out the storm. But that does not invalidate the former investor's desire for the stability of dividends.

6) When dividends do begin to be paid, those who would rather have Buffett reinvest their cash can partially accomplish this by using those dividends to buy more shares of BRK

7) To those who suggest that if one thinks that they could invest (a portion of) the cash flow of Berkshire, then there is no reason to invest, again, this is flawed thinking. There is nothing inconsistent or illogical about someone wanting to invest in the fine collection of businesses already owned here, but who at the same time believes they may be able to find some uses of the funds that could be better than are available to Buffett. Or maybe they don't need to make any more money, and want to use this cash flow simply to SPEND. And, this is not an all-or-none issue; likely most people who would like to see a dividend are not suggesting that the entire free cash flow every year be distributed.

8) There really is no question about whether or not Berkshire will pay a dividend; the question is simply when. So to those who would like to see a dividend, I would encourage patience. It will happen. And my GUESS is that one of two things is going to happen soon: either market conditions will develop that will allow Buffett to shoot some elephants, or he will start to pay some dividends (note: "soon" is meant in Buffett-time, which seems to be slower than that of most of us who are less patient). And it seems almost a certainty that once Buffett turns over the reins and his stake goes to his foundation, then Berkshire would likely have a very generous dividend policy (in terms of the votes cast by the foundation, I believe that it would be in their long-term interest to have the 5% of their assets that they have to give away yearly come from dividends rather than sales of shares, so that they can maintain their voting strength within the company).

9) I believe that one can make this a bigger matter than it needs to be. Regardless of what one's personal preference is on dividends, Berkshire is going to prove to be a good investment. Regardless of when dividends begin to be paid, I do believe that anyone who does not trust that Buffett is going to do intelligent things with the cash flow of this company, and that the current subsidiaries are going to continue to shine, should clearly go elsewhere. And if Buffett and the subsidiaries DO continue to shine, we should all make plenty of money either way.

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