Buffett has a soft spot for dividends, but his subsidiary Berkshire Hathaway has always adhered to the strategy of not paying dividends, despite its huge cash reserves.
Warren Buffett (Warren Buffett) likes to buy shares that pay dividends, but his corporate group Berkshire Hathaway A (BRK.A.N) itself doesn't pay dividends, even though it has tens of billions of dollars in cash.
Regular dividends are a way to return shareholders, usually distributing a portion of a company's profits in the form of cash every quarter. Sometimes companies even offer small discounts for dividend reinvestment. But the main reason Berkshire doesn't pay dividends is that Buffett is confident in his ability to allocate capital in a more profitable way. Even if Buffett thinks he can't make effective use of his cash reserves, he will choose a buyback plan to return capital to shareholders rather than dividends.
In an interview with CNBC in 2018, Buffett said, “There is an implicit promise that the dividend will continue to be paid and will not decrease.” And buying back Berkshire's own shares is often more beneficial to shareholders. Of the two, “we're probably leaning towards repurchasing,” he said.
The 93-year-old investor also ruled out the possibility of a one-time special dividend. Almost all of the major holdings in Berkshire's stock portfolio are dividend stocks. Apple (AAPL.O) accounts for more than 40% of the portfolio and has a dividend ratio of 0.6%. Bank of America (BAC.N), Berkshire's second-largest holding company, has a dividend yield of 2.5%. The long-term Coca-Cola (KO.N) dividend ratio for long-term holdings is 3.1%. Chevron (CVX.N)'s dividend ratio is as high as 3.9%, while American Express (AXP.N)'s dividend ratio is 1.2%.
Berkshire launched a buyback program in 2011. In recent years, it has relied on buybacks due to fierce competition in transactions and expensive stock markets. In 2021, as Buffett found few opportunities for external acquisitions, the conglomerate's repurchase expenses reached a record $27 billion. Even so, buybacks have slowed over the past year.
Buffett recently recalled the only time Berkshire paid a dividend: it was in 1967, just two years after Buffett took over the bankrupt textile manufacturer, and the dividend was 10 cents per share.
“This was a terrible mistake,” Buffett said at the 2023 annual meeting, followed by a slight laughter. “I always tell people that I went to the men's restroom and the directors voted when I wasn't there. But that's not the case. I was there at the time, I admit it. In 2014, Berkshire voted to pay a “meaningful annual dividend.” A few Class A shareholders with original shares of Berkshire, each selling hundreds of thousands of dollars, voted against with 89 votes against 1, but even hundreds of thousands of Class B shareholders voted against 1 with 47 votes against 1.
“I think they want us to do whatever we think makes sense for all shareholders,” Buffett said in 2023. “Obviously, if we really think we'll never be able to use this money effectively in the business, we should take it out in one way or another.”
