Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is one of the best-known companies in the world, largely because of the popularity of CEO Warren Buffett. Seen as one of the greatest investors of all time, Buffett loves to invest Berkshire's money in stocks that pay dividend income -- but he's never seen it necessary to have Berkshire start paying a dividend of its own to its shareholders.

Few longtime shareholders have complained about Berkshire's lack of a dividend payout, given its strong share-price gains. Yet there are still some who believe that Berkshire should pay a dividend, especially because it has so much cash on hand. Below, we'll weigh those arguments and see whether it's likely that it will pull the trigger on a dividend to shareholders in 2019.

Stats on Berkshire Hathaway

Metric

Current Stat

Net income, last 12 months

$61.96 billion

Free cash flow, last 12 months

$21.5 billion

Earnings per Class A share, last 12 months

$37,678

Earnings growth from full-year 2017

38%

Data source: Yahoo! Finance.

Buffett on dividends

Buffett isn't blind to the apparent disconnect between Berkshire's policy on choosing dividend-paying investments and its own choice not to pay dividends. In his 2012 shareholder letter, Buffett admitted that Berkshire Hathaway generates a huge amount of available capital and that he expects it to continue to do so for the foreseeable future. He then set out his hierarchy for the best uses of that capital:

  • In Buffett's own words, "A company's management should first examine reinvestment possibilities offered by its current business -- projects to become more efficient, expand territorially, extend and improve product lines, or to otherwise widen the economic moat separating the company from its competitors." When profitable reinvestment opportunities are available, they can produce greater benefits for shareholders than receiving cash.
  • After exhausting those reinvestment opportunities, Buffett says, "Our next step is to search for acquisitions unrelated to our current businesses." The test for such acquisitions is whether they'll make shareholders better off than they were before the acquisition took place.
  • Third, a company can consider stock repurchases. Buffett's argument here is one that he's repeated several times: "[A stock repurchase] is sensible for a company when its shares sell at a meaningful discount to conservatively calculated intrinsic value."

Buffett then acknowledged that dividends are a way for shareholders to draw income from their holdings. Yet he argued that shareholders end up better off if they simply sell off a portion of their shares to generate the equivalent income, because that allows Berkshire to continue to grow. In addition, shareholders can time their sales to obtain the best tax consequences -- something that dividend payments take out of investors' hands.

Warren Buffett with a bunch of people in the background out of focus.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

When could Berkshire pay a dividend?

Even then, though, Buffett acknowledged the potential for a future dividend. His views rest on the assumption that Berkshire can continue to grow book value and sustain a premium in its share price. If those factors change, then he'd look at dividend policy again.

Berkshire's ability to grow book value at a healthy rate relies on good investment ideas, and, unfortunately, they've been tough to find lately. That's driven Berkshire to loosen its guidelines on buying back its own shares, and it's also led to massive investments in some of the largest publicly traded stocks in the market -- investments that haven't always gone as well in the short run as some might have hoped. But it could also push Buffett toward considering a dividend as well.

For now, though, Buffett seems content to use available capital for investing. As long as he's convinced that the long-term prospects of his investments will help Berkshire build up its book value over time, Berkshire shareholders shouldn't expect to start getting dividends.

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