Investing Guidelines: Management Tenets 89another, a company that must integrate and manage a new business is apt
to make mistakes that could be costly to shareholders.
In Buffett’s mind, the only reasonable and responsible course for
companies that have a growing pile of cash that cannot be reinvested at
above-average rates is to return that money to the shareholders. For that,
two methods are available: raising the dividend or buying back shares.
With cash in hand from their dividends, shareholders have the oppor-
tunity to look elsewhere for higher returns. On the surface, this seems to
be a good deal, and therefore many people view increased dividends as a
sign of companies that are doing well. Buffett believes that this is so only
if investors can get more for their cash than the company could generate
if it retained the earnings and reinvested in the company.
Over the years, Berkshire Hathaway has earned very high returns
from its capital and has retained all its earnings. With such high returns,
shareholders would have been ill served if they were paid a dividend.
Not surprisingly, Berkshire does not pay a dividend. And that’s just f ine
Lest anyone still consider buying a debt-ridden bankrupt
company a surprising move, there was also a third reason for
Buffett ’s decision, which should come as no surprise whatso-
ever: He was able to acquire the company on very favorable f i-
nancial terms. For details, see Chapter 8.
Buying an underwear maker creates lots of opportunities
for corny jokes, and Buffett, an accomplished punster, made the
most of it. At the 2002 shareholders meeting, when asked the
obvious question, he teased the audience with a half answer:
“When I wear underwear at all, which I rarely do.. .” Leaving
the crowd to decide for themselves whether it’s boxers or briefs
for Buffett. He pointed out why there’s “a favorable bottom
line” in underwear: “It’s an elastic market.” Finally, he dead-
panned, Charlie Munger had given him an additional reason to
buy the company: “For years Charlie has been telling me,
‘Warren, we have to get into women’s underwear.’ Charlie is- It’s now or never.”^8