Tuesday, September 27, 2011

Oh, C'mon Warren, Just Pay A Dividend, Already


Berkshire Hathaway announced yesterday that it was instituting the first ever stock buy-back program in the company's history.

Here' s an excerpt from a Bloomberg story about the decision:

{Berkshire} is authorized to repurchase stock for the first time in four decades as long as its price is less than 1.1 times book value, or assets minus liabilities, according to a statement yesterday. The level is 29 percent below Berkshire’s average of 1.55 since 2000, almost the same discount investors are getting in the S&P 500, according to data compiled by Bloomberg. Shares of Omaha, Nebraska-based Berkshire fell to $100,000 for the first time in almost two years on Sept. 22.

http://www.bloomberg.com/news/2011-09-27/buffett-buyback-shows-s-p-500-passes-berkshire-book-value-test.html

Not surprisingly, Berkshire's stock jumped over +7% yesterday on the news. After all, it's not often that you get a clear message from Warren Buffett that he thinks his company's stock is more attractive than many other alternatives.

Now, far be it from me to question the The Oracle, but my clients and me (all of whom own shares of Berkshire) would have preferred the company to pay a cash dividend instead.

Buffett has authorized a cash dividend only once since he took over Berkshire in the early 1960's. In 1967, Berkshire paid a $0.10 dividend to shareholders, but Buffett quickly ended the payout.

Over the years, Buffett has joked about the decision to pay a dividend: "I must have been in the bathroom" he likes to quip. Since then, for a number of reasons - either tax-related or his own investment acumen - he has been steadfast in his refusal to reinstate the dividend.

But times have changed, and so has his investor base. Yields are paltry everywhere you look, and while I know that his investors can always sell shares to raise cash, it might be just as easy to return a little cash to his loyal investors.

Dividends are taxed at 15% currently - the same rate as long-term capital gains rate. True, in 2013, dividends are scheduled to return to ordinary income tax levels (meaning a maximum of 39.6%, at the highest income level), but at this writing the future of tax policy is uncertain at best.

Berkshire is estimated to have more than $77 billion in cash and cash equivalents at the end of the second quarter (according to Whitney Tilson of T2 Partners, a hedge fund whose largest holding is Berkshire shares). This staggering sum is about 43% of Berkshire's market cap, and could very well be one of the reasons that Berkshire's stock has struggled (after all, why pay a multiple of earnings for a stock that has so much cash?).

Look at this way, Warren: your shareholders will be able to contribute a little more to reducing the federal deficit.