As Warren Buffett prepares to put the final touches on his long-awaited annual letter to
shareholders, the CEO has a lot to address.
They include the underperformance of Berkshire stocks (ticker: BRK.A and BRK.B) over the past one, five, and ten years, Buffett’s cautious approach to new investments, and Berkshire’s spotty acquisition history over the last decade.
However, that letter, due out Feb. 27, along with the annual report and fourth-quarter earnings, may help write Berkshire’s next chapter. All you would need is an announcement of the start of a dividend.
A 2% dividend would be a good start, representing about 40% of projected earnings for 2021. It would likely lift stocks by broadening the potential investor base to those who want or need dividends.
Berkshire has increased its share buybacks, buying back $ 15.7 billion worth of shares in the first three quarters of 2020, or about 3% of the shares outstanding. But with $ 146 billion in cash and projected earnings for this year of $ 25 billion, it has the ability to pay a dividend and buy back shares.
“Berkshire should pay a dividend; this would increase the attractiveness of the stocks for investors who want current income, ”says David King, co-manager of the Columbia Flexible Capital Income fund. “Given Berkshire’s size and financial strength, the company is unique in not paying dividends and that should be changed.”
Berkshire has not paid dividends for more than 50 years. Why? Buffett’s view has been that a dollar in his hands is better than a dollar in the hands of shareholders. That was the case for a long time 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 issue of dividends, arguing that the best and most 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 withdrawal policy on all shareholders. If, say, 40% of profit is politics, those who want 30% or 50% will be frustrated, ”Buffett wrote. “Our 600,000 shareholders cover the coast in their desires for cash. However, it is safe to say that many of them, perhaps even most, are in net savings mode and logically they should not prefer any payments. ”
In 2014, Berkshire holders overwhelmingly rejected a proxy proxy for dividends.
E = Estimate
Sources: Bloomberg, Edward Jones
However, 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 balance has grown a lot,” he says, adding that significant buybacks at Berkshire are more difficult than at other large companies because there is less liquidity in their shares.
Berkshire’s Class A shares have lagged behind
S&P 500 Index
by 40 percentage points from the end of 2018. They now look attractive at around $ 368,000, less than 1.3 times the estimated book value for the end of 2020 of around $ 287,000 and about 23 times the projected earnings for 2021. Its Class B shares They trade around $ 243.
Berkshire has traded at about 1.4 times book value in the past five years, with profits set to rise in 2021, thanks to companies exposed to an improving economy, such as the Burlington Northern Santa Fe Railroad.
However, the last decade has been one of Buffett’s missed opportunities, with the interest in
(AAPL) the notable exception. While the recently revealed big buys at
(CVX) made waves, Berkshire was likely a net seller of about $ 9 billion in stock last year. The company was also unable to capitalize on the market turbulence and make large acquisitions.
So what else could Berkshire shareholders expect to see in the annual letter? More disclosure would help. It’s difficult to know exactly how well Precision Castparts and other major Berkshire companies are doing because the company doesn’t break down its results.
There’s also the issue of succession, with Buffett turning 90 last August. Buffett could hand over the CEO job to Berkshire Vice Chairman Greg Abel while he remains chairman and continues to oversee Berkshire’s investment portfolio, which includes $ 270 billion in equity.
Berkshire has not named a heir apparent to Buffett, but it is widely assumed to be Abel, 58, who oversees Berkshire’s vast non-insurance operations, including Burlington Northern.
That would give Abel an important experience while Buffett is still on the scene, allowing him to take new steps, such as potentially celebrating Berkshire’s first investor day.
And whether it’s Abel or someone else, a dividend would ease pressure on Buffett’s successor to reinvest Berkshire’s torrent of earnings and align the conglomerate with most of the other giant companies.
Write to Andrew Bary at [email protected]