Berkshire Hathaway
Was BNI Worth Waiting For?

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By commoncents33
November 24, 2009

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One of the things I hate about a business such as an automobile company is that the "earnings" are somewhat of a mirage. They aren't really free to be distributed to the shareholders, as the company has to invest to perennially re-invent their product. This is the opposite of the "wonderful business" Buffett has long sought. (A great example of the opposite is Paychex, which continually spews off its excess cash, despite continual growth).

Well, I'm wondering if Berkshire is not in some ways in this same category...or if at least Buffett does not approach it in this way.

For nearly a decade, we've been sitting on a mountain of cash, foregoing dividends or share repurchases. To the faithful, the idea was always that Buffett was simply biding his time, and that one day he was going to hit the ball out of the park, making up for all these years lost earning minuscule interest rates.

After all the agonized waiting we get...a railroad company? Really? Now whether or not BNI is currently a decent investment, it hardly seems like it was worth waiting for almost a decade in lousy-paying-cash.

So what's up with this? I believe it is clear that Buffett simply does not view returning cash to shareholders either in the form of a dividend or a share repurchase as something he will consider. And I believe the main reason is not because of all that stuff about a retained dollar being worth more than a dollar later (it is quite hard to make the case that some dollar sitting around in cash for the past eight years is now suddenly worthwhile by being put into BNI at $100/share, seriously). I believe Buffett--whether right or wrong--believes that the inviolable priority is to maximize Berkshire's financial strength to deepen it's moat as the Fort Knox of insurance. If this isn't the explanation, then I believe Buffett simply has not been an admirable allocator of Berkshire's capital for the past decade, and for anyone too blind-with-Buffett to see this, simply look at the numbers. The growth in intrinsic value has really been quite mediocre.

Now I do not know if this never-distribute-capital dogma is the best thing for Berkshire or not. However, I do believe that any investor in Berkshire should come to terms with this so that they can make a rational decision. If you're hoping to ever see cash returned as a dividend or a share repurchase, you'll be disappointed.

For all practical purposes, Berkshire's earnings (at least during Buffett's life) are not free to be distributed.