Barron's - USA (2021-02-22)

February 22, 2021 BARRON’S 13

Berkshire hasn’t paid a dividend

for over 50 years. Why? Buffett’s view

has been that a dollar in his hands is

better than one in the hands of share-

holders. That was long the case as

Buffett worked his investment and

acquisition magic, but it has been less

true in recent years. Buffett declined

to comment for this article.

In his 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 stock each year.

“First, dividends impose a specific

cash-out policy upon all shareholders.

If, say, 40% of earnings is the policy,

those who wish 30% or 50% will be

thwarted,” Buffett wrote. “Our

600,000 shareholders cover the wa-

terfront in their desires for cash. It is

safe to say, however, that a great many

of them—perhaps even most of them—

are in a net-savings mode and logi-

cally should prefer no payment at all.”

In 2014, Berkshire holders over-

whelmingly rejected a proxy proposal

on dividends.

Yet Berkshire’s cash has more than

doubled since then, notes Edward

Jones analyst James Shanahan, who

favors a dividend. “A dividend is a

good idea if only because the cash bal-

ance has grown so much,” he says,

adding that significant repurchases at

Berkshire are more difficult than at

other big companies because there is

less liquidity in its stock.

Berkshire’s class A shares have

lagged behind the S&P 500 index by

40 percentage points since the end of

2018. They now look appealing at

around $368,000, less than 1.3 times

estimated year-end 2020 book value

of around $287,000 and about 23

times projected 2021 earnings. Its

class B shares trade around $243.

Berkshire has traded at closer to 1.

times book value in the past five years,

and earnings are set to climb in 2021,

thanks to businesses with exposure to

an improving economy, like the Burl-

ington Northern Santa Fe railroad.

Still, the past decade has been one

of missed opportunities for Buffett—

with the stake inApple(AAPL) the

notable exception. While the recently

disclosed big purchases inVerizon

Communications(VZ) andChevron

(CVX) made waves, Berkshire was

likely a net seller of about $9 billion of

stocks last year. The company also

failed to capitalize on the market tur-

moil and make any big acquisitions.

So what else might Berkshire

shareholders hope to see in the annual

letter? More disclosure would help.

It’s hard to know exactly how well

Precision Castparts and other major

Berkshire businesses are doing be-

cause the company doesn’t break out

their results.

There is also the question of succes-

sion, with Buffett turning 90 last Au-

gust. Buffett could give up the CEO

job to Berkshire’s vice chairman, Greg

Abel, while remaining chairman and

continuing to oversee Berkshire’s in-

vestment portfolio, including $

billion of stocks.

Berkshire hasn’t named an heir

apparent to Buffett, but it’s widely

assumed to be Abel, 58, who oversees

Berkshire’s vast noninsurance opera-

tions, including Burlington Northern.

That would give Abel important

experience while Buffett is still on the

scene, allowing Abel to take new

steps, like potentially holding Berk-

shire’s first investor day.

And whether it is Abel or someone

else, a dividend would take pressure

off Buffett’s successor to reinvest

Berkshire’s earnings torrent and align

the conglomerate with most other

giant companies.B

Dividend? Succession?

What to Watch in Buffett’s

Yearly Shareholder Letter

Berkshire Hathaway has lagged behind the market in recent years, but the CEO could

help write the next chapter for the conglomerate by answering some key questions.

The Best Is Past

How Berkshire Hathaway's returns

stackup against the S&P 500's.

Annualized Total Return

■Berkshire Hathaway■S&P 500

Annualized total returns are for 5, 10, and 20-year

periods.Dataasof2/17/21. Source:Bloomberg

1-Year 5-Year 10-Year 20-Year

0

5

10

15

20%

Berkshire

At a Glance

$367,

Recent Price

$13,

2020E EPS

$16,

2021E EPS

23. 
    

2021E P/E

$287,

2020E Book Value

1. 
   

Price/2020E

Book Value

$572.3 B

Market Value

15.5%

Stake of Top

Shareholder

(Warren Buffett)

E=Estimate

Sources: Bloomberg,

Edward Jones

By ANDREW BARY

A

s Warren Buffett prepares

to put the finishing

touches on his eagerly

awaited annual letter to

Berkshire Hathaway

shareholders, the CEO has

much to address.

They include the underperfor-

mance of Berkshire (ticker: BRK.A

and BRK.B) shares over the past one,

five, and 10 years, Buffett’s cautious

approach to new investments, and the

spotty record of Berkshire’s acquisi-

tions over the past decade.

Yet that letter—due out on Feb. 27,

along with the annual report and

fourth-quarter earnings—can help

write Berkshire’s next chapter. All it

would need is an announcement of the

initiation of a dividend.

A dividend of 2% would be a good

start, representing about 40% of pro-

jected 2021 earnings. It would proba-

bly lift the stock by broadening the

base of potential investors to those

who want or need dividends.

Berkshire has stepped up its share

repurchases, buying back $15.7 billion

of stock in the first three quarters of

2020, or about 3% of the shares out-

standing. But with $146 billion in cash

and projected earnings this year of $

billion, it has the ability to pay a divi-

dend as well as to buy back stock.

“Berkshire should pay a dividend;

this would increase the appeal of the

shares to investors who want current

income,” says David King, co-man-

ager of the Columbia Flexible Capital

Income fund. “Given Berkshire’s size

and financial strength, the company

is unique in paying no dividend and

Paul Morigi/Getty Images for Fortune/Time Incthat should be changed.”