1995: Should Coca-Cola be like Berkshire and stop paying dividends?

AUDIENCE MEMBER: Thank you. Second question concerns dividends. Last Friday night, by coincidence, on Louis Rukeyser’s weekly television show, the special guest was Philip Carret.

And Mr. Carret made the statement that his favorite American stock is Berkshire Hathaway. And one of the major reasons he stated was that, “Berkshire has never paid a dividend, as we all know,” and consequently, you had superior utilization of the extra cash.

Now, if you extend that reasoning, could it also be a beneficial policy if Coca-Cola and Gillette stopped paying dividends and utilized the cash in other ways?

WARREN BUFFETT: Well, it depends what they could use the — how they would use — utilize the cash, what they could use it for. Those are more focused enterprises than Berkshire, at least in terms of products.

And they — I think — I commend managements that have a wonderful business for utilizing cash in those wonderful businesses, or in businesses that they understand and that will also have wonderful economics, and for getting the rest of the money back to the shareholders.

So, Coca-Cola, in my book, is doing exactly the right thing with its cash when it both — when, A, it uses all the cash that it can, effectively, in the business to expand in new markets and all of that sort of thing.

But then beyond that, it pays a dividend which distributes cash to shareholders, and then it repurchases shares in a big way, which returns cash on a selective basis to shareholders, but in a way that benefits all of them.

So, we — you will benefit from us not paying dividends just as long as we can use the — every dollar we retain — to produce more than a dollar of value, and of market value over time.

Whether we can continue doing that, you know, how long we can continue doing that, I can’t promise you, but that is the — that’s the yardstick by which the decision is made.

And that is the yardstick, I think, by which Coca-Cola’s making the decision, too. And I think that they deserve great credit for exercising the discipline to quit when they — using cash — when they’ve run out of the opportunities to use it well, and then to use it — then to further deploy it advantageously by repurchasing shares.

I think one of the things I admire about my friend, Bill Gates, he’s got 4 1/2 billion of cash in Microsoft, and very few managements can stand having 4 1/2 billion of cash and not doing something unintelligent with it.

So far, it’s made sense for us to retain everything we earn, and I think it’ll make sense for a while longer, but it may not make sense indefinitely.

Charlie?

CHARLIE MUNGER: I hope it lasts a long time. (Laughter)