Berkshire

Hathaway: Dividend
Policy Paradigm

Roderick Jackson Jr
Dr. Rodriguez
Managerial Finance
3-16-2020
Berkshire Hathaway: Dividend Policy Paradigm

Introduction
Berkshire Hathaway, a company headed by Warren Buffet, has grown into one of the most
successful companies in history, making tremendous growth in its various sectors since its
inception in the year 1955. The company began through Warren Buffet’s purchase of shares
from a textile manufacturer that led him to take control of the company and begin to invest its
cash. Over the years, Buffet’s investment tactics and knowledge has propelled Berkshire
Hathaway to what it is now. Berkshire currently includes a diverse portfolio that consists of
financial services, insurance, real estate, utilities, energy, and manufacturing sectors. Buffet’s
strategy has consisted of developing a company position that capitalizes on economic growth in a
number of ways.

Overarching Issue
The overarching issue that this case is centered on is the payment of dividends. Berkshire
Hathaway has never paid its shareholders in the form of cash dividends, although, the company’s
share price is among the highest in the world. Berkshire’s portfolio contains many favorable
instances that signal that the company is a great investment, including a formidable track record
matched with the investing prowess of Buffet and his management team that recognize the
importance of providing value to its shareholders. Berkshire Hathaway checks many boxes, but it
does not check the box of providing a dividend to its shareholders, as Warren Buffet does not
believe in doing so. The conclusion of this case focuses on the question of paying dividends
versus not paying dividends, and this is based on certain factors. These factors are listed as
followed:
 Berkshire Hathaway has accumulated in abundance of cash in the bank that has decreased
the real value of reserves due to the yield on the cash balances being less than the
inflation rate
 Berkshire is in a position to pay a one-time dividend of $20 billion and have enough
remaining cash to pursue future investment requirements
 Limit on potential acquisitions
 Lack of promising stocks that can be purchases at a fair price
 Failed acquisition of Unilever NV
 Warren Buffet inclines towards share repurchase instead of paying cash dividends
Warren Buffet’s No-Dividend Policy
Berkshire has developed a massive portfolio with its business acquisitions throughout its life
cycle. Berkshire has its revenues coming in from several different sources. To go along with its
extensive portfolio, including Gillette Corporation, US Airways Group, the Coca-Cola company,
Champion International Corporation, and GEICO, Berkshire owns billions of dollars of publicly
traded stocks and has accumulated a vast amount of investable cash during its years of operation.
As a company receives shareholder investments, the company can either fund this into its capital
growth or pay it out the free cash flows in equity as dividends. In turn, the dividends that the
shareholders receive can either be spent by the shareholder, or the shareholder can re-invest the
dividends back into the company. Warren Buffet does not give his shareholders that option, as he
believes more value can be created for the shareholders by not allocating dividends and that
paying dividends is not a good use of cash. Although, investors may look at the company’s cash
flows and wonder why Buffet feels that the company should not pay dividends to its
shareholders when they are very capable of doing so. Warren Buffet states that if Berkshire were
to pay a dividend, every dollar of the dividend payments received by shareholders would be one
dollar fewer if he managed it. Therefore, dividends are vital to Berkshire’s total returns to its
shareholders. This is why Buffet is opposed to paying dividends. Berkshire’s book value has
compounded at an average rate of 19.1% since 1965. This supports Buffet’s assertion that he can
find a better use for the cash Berkshire accumulates compared to paying it out to shareholders.
Buffet’s principles are defined in two steps: (1) The first priority with available funds is to
evaluate whether they can be reinvested into the existing business. (2) Search for unrelated
acquisitions to the current business. Buffet also considered share repurchases as another use of
funds at Berkshire, and provided two scenarios to support his position of not paying dividends
 Two equal owners of business, net worth of $2 million, return on net worth = 12% annum
 Existing buyer to purchase company at value of 125 per cent of net worth
 Scenario A: Pay 1/3 of earnings as a dividend and reinvest the remaining 2/3
o Year 0: $80,000 would be paid as a dividend ($240,000 x 1/3)
o $160,000 left after dividend payment
o Dividends and earnings would grow by 8% per annum
o Company net worth $4,317,850 after 10 years (result of $2 million compounded
at 8% annum)
o Dividend payment = $86,357, market value of each individual’s holding =
$2,698,656.
 Scenario B: Sell Off
o No dividend payment, entire earnings reinvested
o Owners sell 3.2% of holding, earning 125 per cent of the shares’ book value
o Year 0: each owner would have $40,000, $240,000 reinvested in company at a
growth rate of 12% per annum
o Market value of individual shares = $2,804,425 after 10 years
o Sell-off adds more value to the capital by approximately $105,770 than the
dividend scenario
Berkshire’s important factors
From examining Berkshire’s statements, it shows that they have an abundance of cash. This
would lead shareholders to question the possibility of receiving dividends. Warren Buffet’s
investments has led the company to an overwhelming amount of financial success, leading to
excess cash that continues to grow. As a result, Berkshire has an accumulation of capital that is
highly liquid. Berkshire has almost $116 billion in cash and cash-equivalent reserves that it can
either invest or return to shareholders. Paying dividends would alleviate some of its cash
reserves, but this would also go against the strategy that Buffet has set in place.
Also, Berkshire has expanded so much over the years that it has become difficult for them to find
further acquisition opportunities big enough to compensate for its cash reserves. In order to
distribute the capital of Berkshire in a valuable way, the company will have to target large scale
acquisitions. The problem that exists here is that Berkshire would need to identify a profitable
investment that accounts for all of the cash it has at hand. As Berkshire continues to grow, it will
look more and more favorable for the company to pay out dividends to its shareholders because
they cannot spend all of the cash they receive.

Conclusion
Warren Buffet is set on not paying any cash dividends to its shareholders and believes that he
can provide more value to the shareholders by not returning the free cash flows to equity as
dividends. Not paying dividends has been the company’s strategic notion ever since its beginning
stages. Opting to pay dividends to its shareholders will pose as a big switch for the company.
Buffet’s strategic reasons for not paying dividends has been sustainable to this point, as they
have an abundance of cash and a great number of acquisitions. I believe that Berkshire should
continue to use their existing strategies until it is inevitable for them to continue to do so, due to
an excess of cash that will pose as a management problem and a lack of profitable additions to its
portfolio. At that point, Berkshire should look to pay out dividends from its free cash flow to
equity.