Why does Fairfax pay a dividend?

[Guest]

I just found out about this site the other day and I've been reading it a ton. You guys have a lot of great information and I thank you for sharing it. With that being said, I've had a question about Fairfax that I just cannot come up with an answer. I've searched for this topic on this forum, too, but I did not find the answer.

 

Buffett feels that he can do a better job of allocating funds than his shareholders, or else he would pay a dividend. I also feel that Prem is a much better capital allocator than most anyone else. So, why does he pay out dividends and not just reinvest the funds? Thanks!

[Parsad]

Prem fixed his salary at $600K per year many years ago, not unlike Buffett's fixed salary.  Several years ago, Prem decided to institute a small dividend, so that both he and the many executives at Fairfax, could receive an annual salary based on the economic growth of the business without having to ever sell their shares.  The compensation structure would also be equitable for every shareholder as well. 

 

It's not the most tax-efficient structure, but it is equitable and will increase their income by modest amounts over time.  While Prem lives a frugal life and has the resources outside of Fairfax to meet all his living needs, some of the executives were probably not quite in the same position.  This was his way of making sure they retained their shares instead of selling any of them.  Cheers!   

[Guest Bronco]

I can only imagine this is true with loews as well.

[Guest]

Prem fixed his salary at $600K per year many years ago, not unlike Buffett's fixed salary.  Several years ago, Prem decided to institute a small dividend, so that both he and the many executives at Fairfax, could receive an annual salary based on the economic growth of the business without having to ever sell their shares.  The compensation structure would also be equitable for every shareholder as well. 

 

It's not the most tax-efficient structure, but it is equitable and will increase their income by modest amounts over time.  While Prem lives a frugal life and has the resources outside of Fairfax to meet all his living needs, some of the executives were probably not quite in the same position.  This was his way of making sure they retained their shares instead of selling any of them.  Cheers!   

 

Thanks makes a lot of sense. Thanks, Parsad!

[DynamicPerception]

 

            Div.      Shares          Div. Paid      Accum. Div. Paid 

 

2002    $0.63  14,100,000    $9,072,000.00      $9,072,000.00

2003    $0.98  13,800,000    $13,818,000.00    $22,890,000.00

2004    $1.40  16,000,000    $19,320,000.00    $42,210,000.00

2005    $1.40  17,800,000    $22,400,000.00    $64,610,000.00

2006    $1.40  17,700,000    $24,920,000.00    $89,530,000.00

2007    $2.75  17,700,000    $48,675,000.00  $138,205,000.00

2008    $5.00  17,500,000    $88,500,000.00  $226,705,000.00

2009    $8.00  20,000,000  $140,000,000.00  $366,705,000.00

2010  $10.00  20,000,000  $200,000,000.00  $566,705,000.00

[rick_v]

What is Prem's exact ownership in FFH? Wasn't it something like 1.85m shares? How many of the shares are options on shares.

 

 

[Uccmal]

rick, I think your about right on the number of shares, direct and indirect.  No options for Prem.  Small numbers for other managers.  Not enough to provide even a modicum of dilution.  The cultural expectation is that those who receive the options will convert them and hold the stock as owners.

[woodstove]

There is also merit in stabilizing the share price, because Fairfax is not "fort Knox" like Berkshire, able to thumb nose at manipulations.  When the short campaign was on, Fairfax was harmed as a business - looked like a less stable counterparty for potential buyers of coverage.  So looking more "regular big financial rock" has benefits in getting and retaining business.  Also allows for refinancing of some debt from the past, eg retire 7.5-ish pct and replace with preferred issues at 5-ish.  Dividend is part of the expectations for Fairfax now.

 

Beyond that, I at least don't cut Fairfax as much slack as might be justified.  Sailed too close to abyss a decade ago, some unwise acquisitions.  If I'm going to loan my "mite" to the company, I expect it to pay something out, as a form of discipline on expected return on capital.  If cannot make minimum 4 pct return on capital, then would rather the company shrink by continually returning 4 pct regardless.  If can make more than 4 pct (as have done on average over long time), then fine with me if retain excess over 4 pct for additional capital.

[Uccmal]

Agree fully with Woodstove's assessment.  Would like the dividend to be made quarterly and increased at a stable percentage each year.  Then its my choice to buy more stock or not. 

[oec2000]

What is Prem's exact ownership in FFH? Wasn't it something like 1.85m shares? How many of the shares are options on shares.

 

 

 

There is some confusion over Prem's stake because it is held through a holding company which is owned 51% by Prem and 49% by FFH. The holding co owns about 1.5-1.6m shares. Prem's economic interest is therefore approx 800K shares.

[rick_v]

I still can't figure out Prem's stake in Fairfax, it says he "controls" The Sixty Two investment co which owns the 1,548,000 the other shares too are owned by corporations which he "controls" it does not say what his economic interest is.

 

And if you look back to 1986 the FFH Annual Report states that Sixty Two invested 5m$ into Fairfax, of which was attributed to well known businessmen, an insurance company and finally PREM.

 

So how much of that is owned by PREM? Is the Sixty Two an LP type structure where PREM's compensation could have compounded to the point where he is in control?