WEB:The Oracle of Omaha- Warren Buffett: Buffett's Talk of Dividend Sends Daunting Message

» Kirk - Buffett's Talk of Dividend Sends Daunting Message

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With all the cash BRKA has, why would you want to buy it now only to have some of that cash returned to you as a dividend that you will pay taxes on? This is an interesting problem. If I owned BRKA due to a recent purchase, ie I didn't have huge gains from holding it for 25 years, I'd only want my dividend to match cash being generated. I'd not want to pay a tax on returned capital.

I like buying small companies with loads of cash because it means they have the resources to survive delays in getting their new products out, but if I am looking to buy a large cap company, I'd sure not want some of my purhase returned to me in the form of a taxable dividend. For this reason, I think BRKA will pay a small dividend and not do a big, one time payment ala MSFT.

http://quote.bloomberg.com/apps/news?pid...

Buffett's Talk of Dividend Sends Daunting Message: Chet Currier

May 6 (Bloomberg) -- If the king of investors can't find anything worth buying, where does that leave the rest of us?

The question has been hard to avoid ever since the annual meeting last weekend of Berkshire Hathaway Inc., at which Chairman Warren Buffett once again lamented a dearth of investment opportunities.

Berkshire and its predecessor companies haven't paid a dividend since the 1960s, when Buffett was just getting started on his celebrated financial career. He has always said Berkshire wouldn't pay a dividend as long as there was a promising way for him to put the money to work.

Now, with cash on hand ballooning to $44 billion at last count, he says Berkshire might have to consider it.

``If we sit here a few years from now and we have not successfully deployed more cash, I think the burden of proof will have shifted dramatically,'' Buffett told the assembled multitudes on their annual pilgrimage to Berkshire's hometown of Omaha, Nebraska.

What's wrong with starting a dividend? Seems like a fair enough way to reward aging investors who have patiently stuck with Berkshire all these years, not excluding the 74-year-old Buffett himself.

Gates Opened

For a precedent, dividends have been paid since 2003 at Microsoft Corp., whose chairman, Bill Gates, is the only person ahead of Buffett on the Forbes billionaire list. Gates just happens to be a new member of Berkshire's board.

The thing is, Berkshire stands apart from Microsoft and most other industrial companies. It has long been viewed as a kind of super hedge fund or mutual fund, run by a legendary leader able and willing to find hidden gems in any corner of the markets.

Buffett buys companies whole or parts of them through stock purchases. He has bought bonds when they suited him, and right now he has a big bet against the dollar in foreign exchange. When he says he is running out of ideas, it's certainly not for lack of knowing where to look.

Buffett outlined his basic view of dividend policy in his 1984 letter to shareholders: ``Historically, Berkshire has earned well over market rates on retained earnings. Under such circumstances, any distribution would have been contrary to the financial interest of shareholders.''

Overabundance

As long as the company thought it could keep doing that, he went on to say, ``We will continue to retain all earnings.''

Buffett faces a problem born of his own success -- a mountain of money that gets harder to put to work the larger it grows. An insurance acquisition of ``under $1 billion'' on which he says he is working will barely dent the pile.

With everything that makes him extraordinary, Buffett's dilemma is no different from a problem that faces all investors collectively. Twenty-five years of a financial boom have attracted so many people into the investing game that the naturally occurring opportunities may have been all but picked clean.

In many fields of endeavor, this kind of thing isn't an issue. No matter how many books flood the publishing market, for instance, there is no theoretical limit on how many good ones remain to be written. The field is as big as the human imagination.

Different Deal

In gambling, a casino can always put in more slot machines and blackjack tables. Investing doesn't work that way, since investments must ultimately be based on entities of real or potential economic value -- the supply of which, alas, isn't boundless.

A strong case can be made that the too-many-investors- chasing-too-few-good-investments bind is the biggest single negative hanging over the markets nowadays.

It wouldn't get much better if Berkshire paid a dividend instead of investing its entire cash horde. Some of the payout would go to income taxes -- although, if recent U.S. tax-law changes remain in effect, no more on a percentage basis than if the wealth had been distributed via capital gains as investors sold Berkshire shares.

Once the tax bill is settled, Berkshire would have transferred the problem of what to do with the money from itself to its shareholders, again including Buffett himself.

That's the most dispiriting part of the message a Berkshire dividend would send: Buffett and his cohort Charles Munger, considered among the best financial minds anywhere, would be attesting that they had given up on finding a good use for the money. So here, shareholders, your turn to try.

To contact the writer of this column:
Chet Currier in New York ccurrier@bloomberg.net

Last Updated: May 6, 2005 00:08 EDT

-- posted by Kirk