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Based Upon the Owners Manual,


Guest ValueCarl
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when do board members believe it might be plausible and rational for Mr. Buffett to pay his owners' a dividend? With the addition of Berkshire to the S&P post Burlington and the corresponding split, I speculated it might have been last year.

 

Certainly, his compounding machine has slowed according to "large numbers," and he cannot own all the "white elephants" who roam planet earth. 

 

With so much cash, and a stock price that is lukewarm at best, Mr. Buffett should be revisiting his rules and applying them more akin to what he expects from others whom he invests in.     

 

I am sure this inquiry will bring about a discussion of IV. 

 

 

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My 2 cents.

 

As the largest shareholder, my guess is this:

 

It is tougher for him to invest $85 outside BRK than $100 inside BRK.  He would have to earn 17.6% on the dividend just to get back to even.  That is a big deal to Mr. Methodical.

 

I also think he knows that a fortress balance sheet allows him to do things other companies can't.

 

I say there won't be a dividend as long as he is CEO. 

 

The real question is why didn't BRK buy more common stock during the financial crisis?  This would have been better for shareholders (much better) than a dividend.  My answer to my own question is that he had success in the past with these preferreds...why mess with success?  But buying Loews at $20 or GE at 5 etc etc seems like it would have been natural for him.

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Berkshire can also buy back its own stock which is more tax-efficient than a dividend. I assume that Buffett looked at all the capital allocation alternatives and decided to buy preferreds and the railroad. Berkshire needs to keep a portion of its portfolio in fixed income securities due to insurance liabilities, so preferreds are an alternative to low yielding bonds.

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screenr - you make a good point on the preferreds, but I don't think buybacks are in the cards either.

 

IMO - a buyback would indicate that WEB believes BRK is the best value investment out there.  I don't think he believes that.

 

 

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Bronco,

 

I agree that the buyback is not presently on the cards as my previous post implies. In the future if capital cannot be efficiently reinvested inside Berkshire by Buffett or his successor at decent rates of return due to ever increasing asset base, Berkshire should buy back stock in stead of issuing a dividend.

 

 

 

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WEB has stated that he has an ethical problem with buybacks of Berkshire, as it effectively has him taking advantage of his "partners" (shareholders) in keeping with management's view that shareholders are partners.

 

 

Yeah, I've never quite understood why he hold that point of view, particularly given his typical candor.  Effectively, he just needs to put out a press release announcing a normal course issuer bid with a paragraph stating that, "Management believes that shares are grossly undervalued and that it believes that it's no in the interest of existing shareholders to sell, but if any existing shareholders are dumb enough to sell then BRK will acquire and cancel their shares."  If you tell people that they are dumb to act in a particular way, and then they go ahead and act that way despite your warning, then how are you taking advantage of them?

 

SJ

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  • 3 weeks later...

The national news media, not unlike me, wants Warren to pay his owners' a dividend. I wish they wouldn't telegraph such news, as it makes such an option less likely. Being added to the S&P500 does place a certain level of responsibility on this public entity to feed its hungry citizens, however. Not to mention what certain legacy railroad owners may have expected from their new owner while holding BRK stock in the back ground.   

 

<Finding a suitable purchase is not easy endeavor for the investor, however. The Burlington Northern purchase highlights the challenges Buffett faces when seeking out opportunities.

 

Whereas Buffett could once generate strong returns by picking up small, undervalued companies, the pool of attractive investment opportunities has shrunk significantly as his firm has grown. Today, in order for a company to significantly impact Berkshire's performance, it must be large. The small, fast-moving companies that pocketed the investor staggering returns in the past would barely make a dent in Berkshire.

 

There is a strong chance that Buffett would like to use his massive pile of cash to fund a new purchase. However, finding an attractive destination to sink his funds will be a difficult task going forward.

 

The financial newswires are buzzing this week in response to a recent Buffett-related article in Barron's which forecasted that a dividend may be in the future for Berkshire Hathaway shareholders. Citing the company's massive surplus of funds and the challenge of finding attractive acquisition targets, the author notes that a dividend could be one logical way the company could utilize its cash on hand.>

 

http://finance.yahoo.com/news/Buffetts-Options-for-His-tsmf-1738517496.html;_ylt=AnpZvWf_ZflmNetm1BCMPby7YWsA;_ylu=X3oDMTE2ZGM3MWFkBHBvcwMxMQRzZWMDdG9wU3RvcmllcwRzbGsDYnVmZmV0dHNvcHRp?x=0&sec=topStories&pos=8&asset=&ccode=   

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Prior to 2008-2009 crisis, Buffett wanted a minimum cash of $10B to satisfy insurance related obligations. But I think his view on this changed as a result of the crisis. Now he says he wants a minimum of $20B cash to handle insurance payments at any point in time. I think this is the main reason he chose to borrow the money to pay for BNI purchase.

 

I think this implies that there will not be any dividend or share buyback anytime soon.

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