What would you do.....

[DooDiligence]

Vroom, vroom...

[thowed]

I hope this relates enough to the OP, but this got me thinking about the future of the A shares i.e. the current holders will have had them for quite a long time, and won't be spring chickens themselves.

 

What happens when they die?  How will their heirs be disposed towards a US$300,000+ share that doesn't produce any income, especially when WEB is gone?

 

I wonder if Howard etc. have any instructions on doing a split at any point?

 

p.s. Apologies if this has been discussed previously - I don't read every BRK thread.

[Jurgis]

I hope this relates enough to the OP, but this got me thinking about the future of the A shares i.e. the current holders will have had them for quite a long time, and won't be spring chickens themselves.

 

What happens when they die?  How will their heirs be disposed towards a US$300,000+ share that doesn't produce any income, especially when WEB is gone?

 

I wonder if Howard etc. have any instructions on doing a split at any point?

 

p.s. Apologies if this has been discussed previously - I don't read every BRK thread.

 

You can always convert A to B. And without taxable event I think, but I am not an accountant/etc.

[StubbleJumper]

I hope this relates enough to the OP, but this got me thinking about the future of the A shares i.e. the current holders will have had them for quite a long time, and won't be spring chickens themselves.

 

What happens when they die?  How will their heirs be disposed towards a US$300,000+ share that doesn't produce any income, especially when WEB is gone?

 

I wonder if Howard etc. have any instructions on doing a split at any point?

 

p.s. Apologies if this has been discussed previously - I don't read every BRK thread.

 

You can always convert A to B. And without taxable event I think, but I am not an accountant/etc.

 

 

Yes, the A shares can definitely be converted to B shares, which would enable holders to more easily sell a portion of their holdings rather than being obligated to sell in tranches of $300k.

 

But, the bigger issue in my mind is that the ownership becomes less concentrated when the original geezers finally take that long dirt nap.  An owner with $100m in shares splits it amongst his four kids at $25m each.  Then, what often happens is that the first generation that actually works to accumulate a fortune tends to be quite thrifty and rarely sells, but the second generation that inherits a fortune has a tendency to fritter away the money.  Those major owners (some of whom are on the board of directors) may not be a source of stability if the second generation partially fritters away their inheritance.

 

At this stage, Warren's life has gone into extra innings, and good for him.  But, I'd love to see a $20B annual dividend initiated in an effort to limit the annual cashflow that the next management teams can mismanage.

 

 

SJ

[rb]

I hope this relates enough to the OP, but this got me thinking about the future of the A shares i.e. the current holders will have had them for quite a long time, and won't be spring chickens themselves.

 

What happens when they die?  How will their heirs be disposed towards a US$300,000+ share that doesn't produce any income, especially when WEB is gone?

 

I wonder if Howard etc. have any instructions on doing a split at any point?

 

p.s. Apologies if this has been discussed previously - I don't read every BRK thread.

Yes they can convert A to B, effectively engineering their split.

 

Also if the tax bill passes the estate tax will be repealed. This will eliminate a large pressure to sell shares.

 

In regards to income it's likely that BRK will introduce a dividend when the cash flows grow large enough. But even without a dividend the holders of shares can borrow against the shares. As long as the margin rates are below BRK returns that would be a smart play.

[DooDiligence]

I think WEB & Chuck have planned for the evolution of Berkshire & a dividend would be super smart (not now please, but eventually.)

 

Also, what about the possibility of upping the buyback threshold & a highly publicized (AGM) repurchase/conversion event.

 

"Scuse me but is this the line for those who want to tender/convert?"

 

"No sir, this is where you make reservations for Gorats."

[John Hjorth]

Can I get an option "I don't care"?

 

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.

 

I have been thinking a bit about your stance on this, Jurgis.

 

I have seen on your blog that you have a large chunk of your capital allocated to Berkshire, Fairfax & Markel. Do you mind sharing the approximate weightings for you within those three?

 

PS: I read your blog monthly. Always interesting to read what you have been up to last month, and your short comments about your thinking related to that.

[Jurgis]

Can I get an option "I don't care"?

 

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.

 

I have been thinking a bit about your stance on this, Jurgis.

 

I have seen on your blog that you have a large chunk of your capital allocated to Berkshire, Fairfax & Markel. Do you mind sharing the approximate weightings for you within those three?

 

PS: I read your blog monthly. Always interesting to read what you have been up to last month, and your short comments about your thinking related to that.

 

I don't mind to disclose, but I have to admit that my percentage allocations are really not indicative of anything. I don't sell on overvaluation or to switch to better investment; I also sometimes buy too slowly or not at all or not the best pick.

Allocations are BRK ~= Fairfax. MKL ~= 1/4 of that. Considering that I bought MKL during their Alterra purchase slump, I would have done much better by allocating more to MKL.

 

But then we also had a topic on CoBF whether FFH or MKL will get to $1K price first. We know the outcome now.  ;)

 

BTW, you're the only person reading my blog. Thanks for being valued member of the audience.

[John Hjorth]

Thanks, Jurgis.

 

- - - o 0 o - - -

[ : - ) ]

[StubbleJumper]

I think WEB & Chuck have planned for the evolution of Berkshire & a dividend would be super smart (not now please, but eventually.)

 

 

 

Warren is 87 years old.  How much longer do you want to wait?  At this stage, his chances of still being around in 5 years are 50:50.  Berkie has what, $100+ billion of cash sitting around and not being deployed?  That strikes me as plenty for an elephant hunt, if that's what Warren and Charlie want.  At this point, institute a healthy dividend (perhaps $20B per year) and stop accumulating cash.  It's virtually certain that the next management team will be far worse capital allocators than the current team, so institute that healthy dividend now so they'll have less cash available to waste.  As we know, once a divvy is in place, they can be pretty tough to roll back....

 

 

SJ

[rb]

So pay out a $20 billion dividend (virtually all free cash) -- no more tuck ins at subs. Yea, that sounds like a brilliant idea.

[StubbleJumper]

So pay out a $20 billion dividend (virtually all free cash) -- no more tuck ins at subs. Yea, that sounds like a brilliant idea.

 

First off, I do not at all appreciate the tone of that comment.

 

Turning to the actual issue, is it your sense that there is currently a lack of liquidity?  Clearly an insurance company needs plenty of liquidity to manage tail risks in their operations.  So, currently consolidated cash and t-bills are what, $109B?  That strikes me as more than healthy, unless there is a legitimate expecation of making like a $40B acquisition in the near future.

 

With respect to free cashflow, do you doubt that cash from operations will exceed $40 billion by 2022?  Seriously, it has never really crossed my mind that cash from operations wouldn't continue to grow.  So, yep, you do need something for maintenance capex...  But, with $40B of cash from operations, there's plenty of room for a healthy dividend.  And, with current cash balances being what they are, I can't imagine any problem starting with a divvy of ~$20b and growing into it.  Remember, my motivation is to keep the next management teams from having the current ridiculous cash inflows and desperately looking for a way to deploy it.

 

Finally, what is your view of Berkie's current capital structure? Are you of the view that the more capital intensive business are not in a position to float debt for major capital projects?

 

Respectfully yours,

 

SJ

[Cigarbutt]

I seem to remember that Mr. Buffett said (or is reported to have said) that it would eventually be hard to justify to shareholders having something like 150 billion at the holding company. So, it is reasonable to expect a dividend if current circumstances are maintained.

 

Also, I would say that, subjective elements aside, over time, the return of what BRK has become (huge) will have to eventually gravitate to the level of the overall market. Long term, one would expect also that the "culture" and the "system" will eventually wear off. So a dividend is likely to make more sense going forward.

 

Of course, given the values built over decades, the reversion to the mean is not for tomorrow.

[DooDiligence]

I think WEB & Chuck have planned for the evolution of Berkshire & a dividend would be super smart (not now please, but eventually.)

 

 

 

Warren is 87 years old.  How much longer do you want to wait?  At this stage, his chances of still being around in 5 years are 50:50.  Berkie has what, $100+ billion of cash sitting around and not being deployed?  That strikes me as plenty for an elephant hunt, if that's what Warren and Charlie want.  At this point, institute a healthy dividend (perhaps $20B per year) and stop accumulating cash.  It's virtually certain that the next management team will be far worse capital allocators than the current team, so institute that healthy dividend now so they'll have less cash available to waste.  As we know, once a divvy is in place, they can be pretty tough to roll back....

 

 

SJ

 

I don't want it to happen until I get my fill of shares.

 

I know, I know, quit thumb sucking & just go all in.

[LC]

A

Good

Question for a Berkshire annual meeting would be: IF they were to institute a dividend, what amount would they choose? It would give us insight into what warren thinks is excess capital and what amount of cash is necessary.

[LongTermView]

As cubsfan said, selling subsidiaries goes against what is in the owner's manual.

 

Buffett's 50 year letter talks about it as well:

Sometimes pundits propose that Berkshire spin-off certain of its businesses. These suggestions make no sense. Our companies are worth more as part of Berkshire than as separate entities. One reason is our ability to move funds between businesses or into new ventures instantly and without tax. In addition, certain costs duplicate themselves, in full or part, if operations are separated. Here’s the most obvious example: Berkshire incurs nominal costs for its single board of directors; were our dozens of subsidiaries to be split off, the overall cost for directors would soar. So, too, would regulatory and administration expenditures.

 

Finally, there are sometimes important tax efficiencies for Subsidiary A because we own Subsidiary B. For example, certain tax credits that are available to our utilities are currently realizable only because we generate huge amounts of taxable income at other Berkshire operations. That gives Berkshire Hathaway Energy a major advantage over most public-utility companies in developing wind and solar projects.

 

...

 

It’s possible, of course, that someday a spin-off or sale at Berkshire would be required by regulators. Berkshire carried out such a spin-off in 1979, when new regulations for bank holding companies forced us to divest a bank we owned in Rockford, Illinois.

 

Voluntary spin-offs, though, make no sense for us: We would lose control value, capital-allocation flexibility and, in some cases, important tax advantages. The CEOs who brilliantly run our subsidiaries now would have difficulty in being as effective if running a spun-off operation, given the operating and financial advantages derived from Berkshire’s ownership. Moreover, the parent and the spun-off operations, once separated, would likely incur moderately greater costs than existed when they were combined.

[Guest longinvestor]

As cubsfan said, selling subsidiaries goes against what is in the owner's manual.

 

Buffett's 50 year letter talks about it as well:

Sometimes pundits propose that Berkshire spin-off certain of its businesses. These suggestions make no sense. Our companies are worth more as part of Berkshire than as separate entities. One reason is our ability to move funds between businesses or into new ventures instantly and without tax. In addition, certain costs duplicate themselves, in full or part, if operations are separated. Here’s the most obvious example: Berkshire incurs nominal costs for its single board of directors; were our dozens of subsidiaries to be split off, the overall cost for directors would soar. So, too, would regulatory and administration expenditures.

 

Finally, there are sometimes important tax efficiencies for Subsidiary A because we own Subsidiary B. For example, certain tax credits that are available to our utilities are currently realizable only because we generate huge amounts of taxable income at other Berkshire operations. That gives Berkshire Hathaway Energy a major advantage over most public-utility companies in developing wind and solar projects.

 

...

 

It’s possible, of course, that someday a spin-off or sale at Berkshire would be required by regulators. Berkshire carried out such a spin-off in 1979, when new regulations for bank holding companies forced us to divest a bank we owned in Rockford, Illinois.

 

Voluntary spin-offs, though, make no sense for us: We would lose control value, capital-allocation flexibility and, in some cases, important tax advantages. The CEOs who brilliantly run our subsidiaries now would have difficulty in being as effective if running a spun-off operation, given the operating and financial advantages derived from Berkshire’s ownership. Moreover, the parent and the spun-off operations, once separated, would likely incur moderately greater costs than existed when they were combined.

Obstructionist.