Berkshire Hathaway's (BRK.A 0.29%)(BRK.B +0.46%) annual meeting is watched closely by Wall Street. Normally that's because investors want to see if Chief Executive Officer Warren Buffett shares any investment wisdom that they can use.
This year, however, the annual meeting included the shock announcement that Buffett was giving up the CEO role at the company he turned into a Wall Street legend.
What comes next is a huge question mark. One area that will be of interest to many is dividends, which Berkshire Hathaway doesn't pay. That's because Buffett doesn't like to pay dividends. Will Greg Abel, who is slated to replace Buffett, take a different approach given the $347 billion in cash the conglomerate has on its balance sheet?
Berkshire Hathaway's superpower
Many consider Buffett a rare investment talent. That's true in a lot of ways, but he is far from infallible. In his shareholder letters, he actually goes to great lengths to discuss the mistakes he's made. But he also talks about larger investment topics that have helped to create value for shareholders over time. One of the big ones is compounding.
Image source: The Motley Fool.
His investment approach is fairly simple in many ways. He attempts to buy well-run businesses when they are attractively priced, if not outright cheap.
But the next step is the big one. He holds on to them for the long term so he can benefit from their growth. They are, effectively, compounding for him, as new growth comes atop old growth. There's a subtle takeaway here: Compounding the dividends Berkshire collects is an important part of the story.
Not only are the companies growing, but when Buffett gets a dividend, he also holds on to it and uses that cash to make more investments. They may be in the same stock or a new one, but the point is to put the dividends to work so they add to the compounding. You can easily do something similar with dividend reinvestment. The big goal is growth on top of growth, with the dividends buying you more shares over time.
Greg Abel trained by Buffett's side
That said, Greg Abel confronts the classic problem of big numbers. It is hard to meaningfully expand a business like Berkshire, which has a market value of more than $1 trillion. S
And yet it is hard to put $347 billion worth of cash to work, since few companies ever grow to that size. In some ways, Abel is inheriting a big problem on his balance sheet: The longer the huge cash pile sits around, the more it acts as an anchor to performance.
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An easy solution would be to simply pay a dividend. Either a large one-time payment or a smaller regular quarterly payment. Don't count on either one.
For starters, Abel has been at Berkshire Hathaway for a quarter of a century. He has been steeped in Buffett's investment approach for a very long time. It is unlikely that he will step into the CEO role and start making extensive changes, since he has likely been involved in most investment decisions for at least a few years now.
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The next big reason to think that no Berkshire dividends will be forthcoming is that the CEO isn't the one who makes that decision. It is the board of directors that decides a company's dividend policy.
Buffett may be leaving the CEO post, but he will remain the chairman of the board. So Abel would have to convince him that a dividend made sense, which seems like it would be a tall order given Buffett's history.
Will Berkshire Hathaway ever pay a dividend?
All in, it seems unlikely that Abel's rise to CEO of Berkshire will trigger an instant change in dividend policy. However, that doesn't mean that the company will never pay a dividend. The cash problem isn't a new one, though it does get increasingly larger over time.
At some point, the board may have little choice but to reward long-time investors with some form of dividend. It just doesn't seem likely to happen when Buffett gives up the role of CEO at the end of 2025.
