Berkshire letter, part 3 -- dividend
In his letter, Warren Buffett repeated (from an earlier letter) the remark that "[s]ince we purchased MidAmerican ten years ago, it has never paid a dividend."
This puts into a new light the sentence "Anticipating ... that Berkshire will generate ever-increasing amounts of cash, we are today quite willing to enter businesses that regularly require large capital expenditures."
Why tell shareholders once again that MEC has never paid a dividend since being acquired by Berkshire? Well, for one thing, it puts the matter on the record, which means that if the policy ever changes, it would be certain to be noticed. As we all know, Buffett dislikes paying dividends and wants Berkshire to keep growing as long as it can find a reasonably attractive use of capital. He's stated that BNI and MEC can use the capital. Why not add a little hurdle to make it harder to pay it out in dividends?
Berkshire owns 89.5% of MEC (up from 79% when acquired in 1999); Walter Scott, David Sokol and Greg Abel own the other 10.5% and are the people who would have benefited had MEC paid a dividend. If any of these people (i.e., Sokol) ran Berkshire Hathaway, the conundrum would arise. Actually, it will arise for anyone who runs Berkshire Hathaway.
Here is your next CEO, thinking, as he sits in his new office in downtown Omaha. (Buffett's old offices in Kiewiti Plaza have been turned into a shrine, managed by Susie Buffett Jr. The invaluable Debbie Bosanek has been whisked away to work for the new CEO. Meanwhile, a separate elevator installed in the lobby next to the See's cart ferries tourists up and down. Tickets cost a reasonable $5 ($2 extra with Cherry Coke included) and the revenues are proudly credited as a separate line item in Berkshire's financial statements.)
Thinks the new CEO:
"How much do I pay myself? Every dollar over $100,000 will get me slammed in comparison to Buffett. Oh, well, maybe that's not necessary. If Berkshire pays a normal dividend, I own so much stock that I can afford to pay myself squat and still maintain the symbolic $100,000 compensation. Oh, no, crap, that won't work either. Buffett took that one away too. It would be like saying that MEC and the damned choo-choo can't use the capital. Plus I would look extra-extra-selfish because MEC never paid me a dividend while I worked at Berkshire.
"All the ways I can take cash out of Berkshire to pay myself are gone except by creating actual value to make the stock price rise over the long term. I can't even monkey around with stock options because Buffett killed phony stock option accounting too. He made it impossible to game the system.
"Screw this. I got my fifteen minutes of fame for taking this job and now it's over. All day long, I get compared unfavorably to Buffett, there are hardly any decisions to make because he made them all before he died, and I can't even get paid like my other CEO friends. WTF."
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Dividend vs Reinvestment
What BRK's partially holding common stock like Coke, KFT, XOM, WMT, WFC, BDX and etc all pay dividend. Dividend is cash flow (value) to investor (directly). However, if company able to earn more than one dollar from a dollar of retained earning, the business value is better to keep the dividend as surplus (or retained earning). However, Is it better for investor point to receive the dividend and the retained earning yet earning more (get the both). Cheers !
multiple motives
there are usually multiple motives for anything warren says. he's efficient.
a lot of the berkshire subs pay dividends up to the corporate level. all this sounds like to me is buffett explaining that this money can be used internally at MEC. if berkshire can keep growing after he's gone he would rather the company not pay a dividend.
keep in mind that berkshire is the equivalent of the world's most profitable private equity fund in that it never pays taxes on the carried interest/never sells or realizes the gain embedded in its acquired companies. if he can keep that going by reinvesting capital and not paying a dividend, i have to believe he's going to do it because it helps the compounding rate.
it's a useful exercise to once again remind the shareholders of the relationship between dividends and use of capital. buffett has said many times that bad capital management is the chief sin of corporate america. i really do believe that he's trying to insulate berkshire against the risk of misused capital in the ways available to him today.
look at it this way. the institutional imperative is the biggest risk you face as shareholders. buffett knows that. if you were him what would you do? he's excellent at risk management and deploying the margin of safety.
this is a wonderful lesson in enterprise risk management. one way to reduce the risk of management succession is to set out a clear philosophy of how to run the business and reinforce it at every possible opportunity.
MEC Dividend
I think WEB is just playing to state regulators with the no MEC dividend statements. He wants to be the savior of choice when the next Constellation Energy goes down. What better calling card to present a regulator than my utilies don't pay dividends.
Maybe....
But I would rather follow Buffett than Jack Welsh or your typical legendary CEO.
How does this sound. When they do the post Buffett transition plan, there is a dividend plan already approved. The dividend would be a fixed percent of profits, like 1/2.
This would make his successor's job much easier, reducing capital allocation significantly. Plus the stock would get a big bump when it is under pressure. And who knows, it might even be proceeded by a buyback. Any dividend would have an impact not totally dissimilar to the inclusion in the S&P, since a lot of investors are limited to dividend paying stocks (like dividend and income funds).
I think BNI has to pay a dividend. Prior to the buyout, BNI paid a dividend as well as repurchased stock. There is no stock to repurchase, so how can the company even invest all that money in infrastructure? They want to pay off the $8 billion, which I believe is Berkshire debt and would require cash to be upstreamed from BNI.
It is also possible that the "no dividend for MEC" policy was announced only because it would attract press attention if it changes, and that attention might be favorable.
I don't recall the figures for BNI, since I read the prospectus a while ago and this is from memory. The dividends and buybacks amounted to something less than 1/2 the earnings. BNI had a stiff hurdle ratio for reinvestment. Assuming that they maintain that, its hard to see how much more than 1/2 the earnings can be rienvested.
And by the way, what did they call the $2 billion pretax windfall on CEG? It did make it up to corporate, right?
Anyway, it should prove interesting. I will go back and revisit the historical BNi data.
Best, T
Maybe....
But I would rather follow Buffett than Jack Welsh or your typical legendary CEO.
How does this sound. When they do the post Buffett transition plan, there is a dividend plan already approved. The dividend would be a fixed percent of profits, like 1/2.
This would make his successor's job much easier, reducing capital allocation significantly. Plus the stock would get a big bump when it is under pressure. And who knows, it might even be proceeded by a buyback. Any dividend would have an impact not totally dissimilar to the inclusion in the S&P, since a lot of investors are limited to dividend paying stocks (like dividend and income funds).
I think BNI has to pay a dividend. Prior to the buyout, BNI paid a dividend as well as repurchased stock. There is no stock to repurchase, so how can the company even invest all that money in infrastructure? They want to pay off the $8 billion, which I believe is Berkshire debt and would require cash to be upstreamed from BNI.
It is also possible that the "no dividend for MEC" policy was announced only because it would attract press attention if it changes, and that attention might be favorable.
I don't recall the figures for BNI, since I read the prospectus a while ago and this is from memory. The dividends and buybacks amounted to something less than 1/2 the earnings. BNI had a stiff hurdle ratio for reinvestment. Assuming that they maintain that, its hard to see how much more than 1/2 the earnings can be rienvested.
And by the way, what did they call the $2 billion pretax windfall on CEG? It did make it up to corporate, right?
Anyway, it should prove interesting. I will go back and revisit the historical BNi data.
Best, T
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