Berkshire Dividend Payment Potential
Very, very few companies are able to allocate capital as widely or as wisely as Warren Buffett can, says Morningstar DividendInvestor editor Josh Peters.
Berkshire Dividend Payment Potential
Jeremy Glaser: Should Berkshire Hathaway pay a dividend? I'm here with
Morningstar Dividend Investor editor Josh Peters to see if
Berkshire should use some of its legendary cash pile and return it
to shareholders. Josh, thanks so much for talking with me today.
Josh Peters: Thanks for bringing up an interesting topic.
Jeremy Glaser: Certainly, Berkshire Hathaway is known for, among other things,
sitting on a big pile of cash that Warren Buffett likes to dole out in
different investments. Should one of those investments be paying
back a dividend to shareholders?
Josh Peters: Actually, this is a very odd position for me to be in, but I think
Berkshire Hathaway may actually be the exception that proves the
rule. I don't think that there is any reason yet that Warren Buffett
needs to start paying a dividend out of Berkshire Hathaway's
Jeremy Glaser: Now, he said, in previous shareholder letters, that he thinks that his
future returns are going to be much more muted than his past
returns. Why shouldn't he give that money back and let
shareholders try their hand at beating the market?
Josh Peters: I think his position is that, as long as he can continue to exceed the
return on the S&P as he would measure it internally, then he's
continuing to add value for his shareholders.
Retaining earnings and reinvesting them at a high rate of return,
even if it's not as high as it had been for Berkshire historically, is
still the value-maximizing situation for this one particular
When I say "the exception that proves the rule," you have very,
very few companies that are able to allocate capital as widely,
across a variety of different industries, business activities and
whatnot, or as wisely as Warren Buffett can.
In Berkshire Hathaway, you're really getting a big mutual fund,
essentially, of some of the world's best businesses, including
insurance, which he's done very well by. Which, in turn, explains
why the company holds a lot of cash--to have ready for insurance
In running these portfolio of businesses, he's essentially acting
more like a portfolio manager than, say, the CEO of any other
company on the street.
Jeremy Glaser: So that's why you'd say a company like Apple, who also has a ton
of cash, maybe should be paying a dividend, because they have
less opportunities to invest so widely?
Josh Peters: Actually, that's a perfect comparison, because Apple is a company
I think should be paying a fairly large dividend. They should be
returning most of their free cash flow to shareholders. Because if
you look at Apple, compared to Berkshire Hathaway, both very
profitable, but Apple has established itself a set of things that it's
very good at doing, but it's very narrow; so within personal
computers, personal electronics, the iPhone.
They're very, very good at what they do, but there's no reason to
think that Apple could take some of its shareholders' cash, some of
the earnings of the company, go off and invest in insurance, or
invest in the Burlington Northern railroad, or a carpet
manufacturer, or a chain of candy shops, and be able to do
anywhere near as well as they could either in their existing
operations, or as well as somebody like Warren Buffett is doing.
The lesson, I think, with Berkshire Hathaway actually proves most
companies should stay within a relatively small circle of operations
that they're good at, that they have competitive advantages, know
how to run, accept the kind of growth potential that those
businesses can have, and all the rest of the cash that the business
generates should be returned to shareholders.
Jeremy Glaser: So do you think that Warren Buffet is then philosophically
opposed to dividends?
Josh Peters: No, I don't even have to guess at that. Here's the way I would think
about it. It was over 30 years ago now that Berkshire Hathaway
acquired See's Candies, and he has pointed out that this business
has been a phenomenal long-term investment and has produced a
lot of cash flow.
Well, where did that cash go? It's not piling up in a checking
account somewhere in California. Every year, Warren Buffett and
the managers of See's are sitting down, deciding how much of the
earnings of See's should be retained in the business and reinvested,
to open new stores or for other capital projects.
The rest is being paid, quite literally, as a dividend, up to the
holding-company level, where Buffett can then decide where best
to invest that. It doesn't necessarily need to go back into See's
Candies. The company could never have grown anywhere near as
fast as all the cash it could have generated would have allowed it to
So there's that theoretical disconnect, and a lot of companies out
there don't recognize that, and a lot of investors don't recognize
that. There are all kinds of dividends going on inside of Berkshire
Jeremy Glaser: So that could be an interesting lesson for investors, when they're
getting dividends from companies, to think about how they're
going to reallocate that money.
Josh Peters: You might even think about it very similar to Warren's own stake
in Berkshire Hathaway. He is not receiving a dividend from his
own shares, because he doesn't need the income. You might not
need dividends from your own personal portfolio right now, or
cash flow to be taken out. You don't need it for living expenses.
But you have the opportunity to reinvest your dividends internally,
inside of your portfolio.
When you own a portfolio of companies that pay dividends, you're
getting the steady cash coming in. You get to take on some of the
capital-allocation opportunities, just like Warren Buffett does at
the top of Berkshire Hathaway.
If you own a portfolio of stocks that don't pay any dividends, then
it's all the corporate managers of the businesses that you own that
are making all of those decisions. I think most investors would like
to call some of those shots on their own. So, yet another reason to
want to put together a portfolio of good dividend-paying stocks.
Jeremy Glaser: At what point, if ever, do you think Warren Buffett will decide to
pay a dividend?
Josh Peters: That's a question that's really impossible to answer. Like I said
earlier, I think that he's probably the best person to make that call. I
would think that with his talents, his knowledge of the markets, his
psychological and mental capacities for investing that really set
him head-and-shoulders above any other investor alive in the
world today, that there's really no reason to expect Berkshire to
pay a dividend while he is still running the company.
I think, at some point, if he's retired, no longer in charge of
Berkshire Hathaway, which could still be a long time from now,
then Berkshire's board will have a much more difficult decision,
which is, do you want to trust some other manager with the same
kind of responsibility of reinvesting all of the earnings?
At that point, that might start to be the time that the board would
want to look at distributing some of the company's excess earnings.
Jeremy Glaser: Josh, thanks so much for joining me today.
Josh Peters: Happy to be here.
Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser.
Berkshire Dividend Payment Potential
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