Warren Buffett turned 90 in August.
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As Warren Buffett prepares to finish his annual letter to
Berkshire Hathaway
shareholders, the CEO has a lot to address.
These include the underperformance of Berkshire (designation: BRK.A and BRK.B)’s shares over the past one, five and ten years, Buffett’s cautious approach to new investments, and the sensitive record of Berkshire’s acquisitions over the past decade.
Still, the letter – which appears on February 27, along with the annual report and fourth-quarter revenue – could help write Berkshire’s next chapter. All it takes is an announcement of the start of a dividend.
A 2% dividend would be a good start, representing about 40% of expected revenue from 2021. This is likely to increase the stock by expanding the base of potential investors to those who want or need dividends.
Berkshire intensified its share buyback and repurchased $ 15.7 billion worth of shares in the first three quarters of 2020, or about 3% of the outstanding shares. But with $ 146 billion in cash and projected earnings of $ 25 billion this year, it has the ability to pay a dividend as well as buy back shares.
‘Berkshire must pay a dividend; it will increase the attractiveness of the shares for investors who want current income, ”says David King, co-manager of the Columbia Flexible Capital Income Fund. “Given Berkshire’s scope and financial strength, the company is unique in paying no dividend, and that needs to change.”
Berkshire has not paid a dividend for more than 50 years. Why? Buffett’s view is that a dollar in his hands is better than one in the hands of shareholders. This has long been the case as Buffett has cultivated his investment and acquisition magic, but this has been less true in recent years. Buffett declined to comment on this article.
In its 2012 annual letter, the CEO addressed the dividend issue, arguing that the better, and more tax-efficient approach would be for investors who want income to sell a small portion of their Berkshire share each year.
‘First, dividends impose a specific payout policy on all shareholders. If, for example, 40% of earnings are the policy, those who want 30% or 50% will be foiled, ”Buffett wrote. ‘Our 600,000 shareholders cover the waterfront in their desire for cash. However, it is safe to say that many of them – perhaps even most of them – are in a net saving mode and logically prefer no payment. ‘
In 2014, Berkshire holders overwhelmingly rejected a proxy dividend proposal.
E = Estimation
Sources: Bloomberg, Edward Jones
Yet Berkshire’s cash has more than doubled since then, says James Shanahan, an analyst at Edward Jones, who prefers a dividend. “A dividend is a good idea, if only because the cash balance has grown so much,” he says, adding that significant buybacks in Berkshire are more difficult than at other large companies because there is less liquidity in its share.
Berkshire’s A shares lagged behind
S&P 500 Index
with 40 percentage points since the end of 2018. They now look attractive at about $ 368,000, less than 1.3 times the estimated book value at the end of 2020 of about $ 287,000 and about 23 times the projected 2021 earnings. The Class B stock is trading around $ 243.
Berkshire has traded closer to 1.4 times book value over the past five years, and earnings are set to climb in 2021, thanks to businesses exposed to an improving economy, such as the Burlington Northern Santa Fe Railway.
The past decade has still been one of the missed opportunities for Buffett – with interest in
appeal
(AAPL) the notable exception. While the recent major purchases in
Verizon Communications
(VZ) en
Chevron
(CVX) made headlines, Berkshire was probably a net seller of about $ 9 billion last year. The company also failed to capitalize on the market turmoil and make major acquisitions.
What else can Berkshire shareholders see in the annual letter? More disclosure will help. It’s hard to know exactly how well Precision Castparts and other large Berkshire businesses are doing because the company is not breaking out their results.
There is also the demand for succession, with Buffett turning 90 last August. Buffett could step down as CEO of Berkshire’s vice chairman Greg Abel, while remaining chairman and still overseeing Berkshire’s $ 270 billion investment portfolio.
Berkshire has not named a heir to Buffett, but it is widely accepted that he is Abel, 58, who oversees Berkshire’s extensive non-insurance operations, including Burlington Northern.
This will give Abel important experience while Buffett is still on the scene, and enable Abel to take new steps, such as keeping Berkshire’s first investor day possible.
And whether it’s Abel or someone else, a dividend will put Buffett’s successor under pressure to reinvest Berkshire’s revenue stream and align the conglomerate with most other giants.
Write to Andrew Bary by [email protected]