Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) doesn't pay a dividend to its shareholders, despite earning some pretty impressive profits. Instead, Buffett thinks the company's profits are put to better use by reinvesting them in the company. And quite frankly, it's tough to argue with that statement, as there are few individuals that most investors would trust more with their money than Warren Buffett.
However, what will happen once Buffett is no longer at the helm of Berkshire? We asked three of our analysts whether Berkshire should pay a dividend once the Buffett era is over, and here's what they had to say.
Patrick Morris: It's no secret I'm a big fan of Berkshire Hathaway as both an investment and an example of a well-run business, and I think no matter who is at the helm, its long-standing strategy of not paying a dividend should be employed indefinitely.
Berkshire is a collection of phenomenal businesses across a litany of industries that are all run by managers who operate with the best interest of shareholders in mind. As a result, even if Buffett isn't in control, there should always be a seemingly unending stream of possible opportunities to make investments in existing businesses that will boost returns.
In addition, I am fairly certain that whoever takes over for Buffett will unquestionably be a leader who is more than capable of carrying on Buffett's legacy of deploying capital at advantageous times to acquire wonderful businesses at fair prices.
In short, when it comes to investing, I trust my money in Buffett's hands more than my own, and the same will be true of whoever succeeds him. So as a result I'd always prefer Berkshire to be without a dividend, so it always has cash at its disposal to use how it sees fit.
Selena Maranjian: Should Berkshire Hathaway pay a dividend after Warren Buffett is gone? Well, my answer to that is... it depends. Whether Berkshire pays a dividend after Buffett has left us or while he's still here and at its helm depends on the answer to the same question: How the company can best serve its shareholders?
It's the same with most companies, actually. Dividends are funded by a company's earnings, but companies have other options regarding how to spend those earnings. They might, for example, pay down debt, or buy back (and essentially retire) some shares (leaving remaining shares worth more), or reinvest in their business (by hiring more workers, buying more advertising, building more factories, and so on), or buy other companies. Dividends are just one option.
Berkshire generates a lot of cash regularly, and it often piles up, into the tens of billions of dollars. It might look like Buffett is squandering a chance to reward shareholders with a dividend, but he's actually waiting for irresistible acquisition opportunities. These can reward shareholders much more than a dividend. For example, Berkshire bought the Burlington Northern Santa Fe railroad for about $34 billion in 2009, and over the past five years it has paid out more than $15 billion in dividends and grown its revenue by 57% -- with more to come.
Buffett has explained that when he thinks he can't find better uses for the company's cash, then a dividend might be in order. We don't seem to be anywhere near that point now. Buffett has also explained that dividends are suboptimal because they trigger taxation and their timing is not chosen by the shareholder, but by the company. When Buffett is gone, I suspect that his successors will be quite mindful of his views on dividends. They may have the same view, too, because it's a rather sensible one.
Dan Dzombak: Yes, Berkshire Hathaway should pay a dividend after Buffett is gone.
Berkshire's best investment opportunities will frequently be in its various businesses. However, Berkshire is generating far more cash than its businesses reasonably can invest and is currently sitting on $55 billion.
It will be up to whoever succeeds Buffett what to do with the cash generated from Berkshire's widespread businesses. While the new CEO is likely to be a good business person and investor, whoever follows Buffett as CEO will probably not be anywhere as great of a capital allocator as Buffett is and will be facing a huge challenge to put Berkshire's sizable investment dollars to work.
As Buffett himself wrote in his 2012 letter to shareholders, "Because of our present size, making acquisitions that are both meaningful and sensible is now more difficult than it has been during most of our years." Having a less able CEO combined with a harder challenge than Buffett faced doesn't give me confidence that the market-beating returns of Berkshire Hathaway will continue for the long term after Buffett is gone.
While Buffett has argued that dividends are suboptimal, they are only suboptimal when the company has market-beating investment opportunities.
Millions of shareholders as a whole can allocate money for its most efficient uses better than a CEO facing a tough job formerly held by the greatest investor of all time. A dividend would allow those who want to reinvest the cash to do so, while others could pursue more productive uses of the funds, whatever that may be for them.
Dan Dzombak has no position in any stocks mentioned. Patrick Morris and Selena Maranjian own shares of Berkshire Hathaway. The Motley Fool recommends and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.