Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Not many people were surprised that Berkshire Hathaway will not be paying a dividend this year. But is there anything that income investors can take away from [chairman Warren] Buffett's latest letter?
I'm here with Josh Peters--editor of Morningstar DividendInvestor and also our director of equity-income strategy--to take a look.
Josh, thanks for joining me.
Josh Peters: Good to be here, Jeremy.
Glaser: Let's start with Berkshire itself. There have been some calls over the years potentially for them to distribute some of their cash back to shareholders. Buffett has very strongly resisted this. It looks like there's not going to be a change to that anytime soon. Do you think that's the right call? Why should Berkshire hold on to all of its cash?
Peters: I think as long as Buffett is in charge of the business--he's overseeing capital allocation at the highest level in that business--there's really no reason why Berkshire needs to pay a dividend. I think that's a situation that implies to almost no other company in the U.S. stock market.
It wasn't that not long ago, after a previous year's letter, I wrote a cover story for DividendInvestor titled, "In Buffett We Trust, All Others Pay Cash." It is really true. Here you have a situation where the world's greatest investor--I don't think I am out there on a limb in saying that--he has the opportunity to reinvest all of the company's internally generated cash. I think that's who you would probably want to do that or obviously if you thought you could do better as a shareholder, then you would own something else.
Other companies, too, like Berkshire, generate a lot more cash than they can reinvest into their internal operations. But typically you don't see them optimize their dividends. Most other companies do pay dividends, but they are typically much lower relative to how much can actually be put back into the business. So these same businesses, while they are not paying enough in dividends, they are out there buying back their own shares. Maybe they are getting a good price for doing it. Maybe more likely than not they're paying high prices and are actually going to destroy shareholder value, or they are making acquisitions where there is a big risk of either paying too much or managing the acquired business badly or both. And in general, I think, you would want to follow what Berkshire does on the inside, which is to look for companies that will upstream all the cash or as much cash as possible to the owners, and let the owners allocate it elsewhere, whether it's to buy more shares in that business or to allocate it to other types of businesses and other types of investments.
Glaser: Do you think Buffett still sees dividends as important even if he is not paying one himself?
Peters: Yes. Inside of Berkshire you have all these different little subsidiaries. I'm sure he's very happy when See's Candies, one of the classics --I'm a big fan of the peanut brittle myself--can come to him and say, "We have a project. We would like to expand a plant, or we would like to add some stores. And we want to take $10 million of the cash we generated and reinvest it back in the business." I am sure he is thrilled. But if See's doesn't have that high-quality of an opportunity, he is going to say, "No. Pay it all back up." All the subsidiaries inside of Berkshire are paying dividends up to the parent-company level.
As a shareholder of many different companies in your own portfolio, dividends give you some of the same flexibility. A company that you own is giving you cash back that you can allocate elsewhere based on where you see the highest opportunities.
If you own a stock like Google, you have no dividend at all. You are trusting the leaders of Google to make all of those capital-allocation decisions and reinvestment decisions, and maybe they are going to do a good job with it.
But just because Google came up with a great search engine and have made a few good deals since then, too--I don't want to criticize their success--there is no proof that they'll be able to reinvest the tens of billions of dollars of cash that they are generating into all sorts of different businesses and get the same kind of results that Warren Buffett has at Berkshire Hathaway.
Google has a different skill set; it's very good. But with Warren Buffett, you have that preeminent, greatest-of-all-time capital allocation skill that you just don't find anywhere else.
Glaser: Outside of any discussion or lack of discussion on dividends this year, was there anything else in the letter that stood out?
Peters: I always like some of the smaller stories that you get--when Buffett drew the analogy to a piece of real estate that he invested in, in New York and a farm in Nebraska that was managed by his son Howard, and how he doesn't have to check a market quote for these assets' worth every day or even every year. He doesn't have to try to move in and out, in order to get a good return.
And the analogy there is that if you have a business that is going to treat you like a partner and you are getting a piece of the results of the business through the dividend, you have that same luxury, too. You can feel like you are invested in your General Mills or you are invested in your Procter & Gamble; as a partner you're receiving a partner type of return. The market going up and down really should not have to matter that much. It's so tempting, because it's moving all the time, to overemphasize those price changes. But with that one, you would rather have the opportunity to act more like an owner-partner.
And of course every year, just a celebration of business culture that you see, sometimes it comes across, I suppose, for some people as a little bit corny. But business is really is a wonderful thing. And to celebrate being part of the business, working in a business, investing in a business, saving and building your own future through business investments, these are wonderful traits of Berkshire that are unique and I hope will go on for decades and decades into the future, whether Berkshire ever gets around to paying a dividend or not.
Glaser: Josh, thanks for your thoughts on Berkshire today.
Peters: Yes. Maybe someday I will get to buy and they will pay a dividend. But for now it's just a wonderful place to observe and learn, even for dividend investors.
