Last week, I made a case for why Microsoft (NASDAQ:MSFT) should increase its dividend. As crazy as it sounds, the software giant is maturing, and it has become more of a cash cow than a blazing growth story. More cash than ever and fewer opportunities to invest it make the company a perfect candidate for upping its payout. Sound familiar? It should, because it's also a perfect description for the situation at Berkshire Hathaway (NYSE:BRK.A).
Much like Microsoft, if Berkshire paid a substantial dividend, it would be a perfect company for me to recommend to subscribers of the Fool's latest investment newsletter, Motley Fool Income Investor. But, for now, we'll have to stick with other top-tier companies that pay out the profits.
Don't misunderstand me here. I have virtually no complaints about how Berkshire Hathaway conducts its business. How could I? Berkshire increased its book value by 10% in 2002 (more than $6 billion), a solid number for any company, but especially one of this size.
This continues Warren Buffett's track record of being the most successful long-term investor the world has ever seen, a fact he is exceedingly modest about. That, coupled with his extremely generous charitable donations, not only makes him a great investor, but it makes him a great human being in my eyes. Indeed, those are all reasons that I became a Berkshire shareholder about a year ago.
You can't win 'em all
However, I honestly believe that even the Oracle of Omaha can become a creature of habit, missing an emerging reality of Berkshire's business. Like Microsoft, the businesses that Berkshire owns generate a great deal more cash than can be profitably reinvested in them.
Now, in the past that hasn't been an issue for Berkshire. Why? Read above. The company has one of the greatest investors in the world at its helm, and he has been incredibly successful at putting the company's immense cash flows to work in new investments.
But, in addition to being brilliant, Mr. Buffett is an extremely patient and uncompromising man when it comes to investing. He is willing to wait forever for an investment to hit his price, refusing to pay a penny more than its perceived value. This is an admirable quality, to be sure, but it also means opportunities are few and far between.
Again, this wasn't as much of an issue in the past, when Berkshire was a much smaller company. At that time, it didn't generate nearly the kind of cash flow that it now produces, nor did it have such a sizable war chest.
After selling virtually all of its Treasury bond holdings in the third quarter, Berkshire currently has about $27 billion in cash. That's more than $17,500 per share (Class A shares recently changed hands at about $83,300 a stub).
Further, Berkshire's size means that today's investments will have a much smaller impact to the bottom line than those of years past. After all, it's a bit easier to influence a $28 billion company than a $128 billion one.
Fully stocked
One thing is clear: New investment opportunities aren't likely to come in the form of stocks such as Coca Cola (NYSE:KO), Gillette (NYSE:G), Washington Post Co. (NYSE:WPO), or American Express (NYSE:AXP) -- all equities that Berkshire has purchased in the past.
Buffett stated recently that he saw absolutely no equity investments in the marketplace that were compelling. He went on to suggest that, if better opportunities didn't present themselves, the company could eventually be forced to pay a dividend in order to pass earnings along to shareholders. Personally, I think that time has already come.
I believe the likelihood of Berkshire being able to reinvest its stratospheric cash flows going forward is extremely thin, which means the cash balance that's currently earning less than 1% is only going to grow larger.
The Foolish bottom line
Certainly it's prudent to maintain an emergency fund and keep cash for possible investment opportunities close at hand, but Berkshire has more than enough cash to do this and pay a sizable dividend. Also, because of its extreme financial fortitude, Berkshire Hathaway has access to funds at rates lower than nearly any other company in the world. That means it simply doesn't need as much cash lying around.
Buffett is getting older, and though he says his doctor tells him his health is in the top 1% of men his age, he'll have to retire at some point. That may be five or 10 years from now -- God willing, it will be longer. But, when this happens, it's even more unlikely that the new managers of the company will be able to put such a substantial amount of cash to work.
I mean really, investors of Buffett's caliber don't come around every day, and in the hands of lesser managers, cash seems to find its way into projects with diminishing returns, especially when said managers are under enormous pressure to live up to their god-like predecessor.
Berkshire might be too large to find appropriate opportunities in the equity market, but its shareholders aren't. Pass those profits along, and let us put them to work. I'm no oracle, but I'm pretty sure we can do better than 1%.
Now what?
Interested in dividend-paying stocks? Take a free trial of Motley Fool Income Investor. Think Buffett should pay out cash to his investors? Will Berkshire's future managers be able to live up to the track record of their superhuman predecessor? Let us know on the Berkshire Hathaway discussion board.
Mathew Emmert lives for dividends, but he's just greedy that way. He's also the author of the Fool's latest income-oriented newsletter, Motley Fool Income Investor. In the spirit of full disclosure, he owns shares in Berkshire Hathaway.
