Warren Buffett once said that shunning dividends in his early years running Berkshire Hathaway Inc. allowed him to refocus the company on better businesses, much as a person would overcome “a misspent youth.”
The 82-year-old billionaire is now focused on his legacy as he prepares the company he’s overseen for almost five decades for new management. Using his annual letter tomorrow to outline a dividend strategy could help explain to shareholders how the company’s next leaders should approach the challenge of allocating profits.
“It may ease the burden on the successors” if they are able to initiate a dividend, said Richard Cook, co-manager of the Cook & Bynum Fund, which counts Berkshire among its largest holdings. Berkshire and its units “generate a lot of cash.”
Buffett has sought to teach shareholders about business, investing and corporate governance through the annual letters and meetings held in Omaha, Nebraska, where Berkshire is based. As the company grew with investment gains and acquisitions, so did its cash pile, which reached $47.8 billion at the end of September. That’s made the task of allocating the funds more difficult, because it’s hard to find worthwhile, large investments, Buffett has said.
The chairman and chief executive officer began buying back shares in 2011 and devoted part of his letter last year to explaining when repurchases make sense. He told CNBC in May that he would probably discuss what makes a logical dividend policy in this year’s letter.
Buffett’s Blessing
“It’s a very sensible move” to describe when companies should pay a dividend, so that the next CEO will be seen as having Buffett’s blessing, said Tom Russo, a partner at Gardner Russo & Gardner, who oversees more than $5 billion, including Berkshire shares. After Buffett’s gone, there will be “a tendency to second-guess,” Russo said.
Buffett took over Berkshire in 1965 and transformed it from a maker of textiles and men’s suit linings into a $251 billion company that sells insurance, hauls freight, generates electricity and operates dozens of manufacturing and retail businesses. His track record and opinions have made his letters a must-read on Wall Street.
He said in the 1985 letter that dividends make sense only when managers can’t generate adequate returns by keeping money in the business. Berkshire didn’t pay a dividend because it had been able to earn above-market rates on retained profits, he said at the time.
Disaster Averted