2000: Will Berkshire pay a dividend in the future?
AUDIENCE MEMBER: My name is Monte Lefholtz from Omaha, Nebraska.
I have a two-part question. What is Berkshire’s philosophy on paying dividends and under what circumstances would Berkshire pay a dividend in the future?
WARREN BUFFETT: Well, that’s a good question. We paid a dividend in — what, 1969, Charlie? At 10 cents a share. The — I can’t remember it, but it’s in the records.
We would pay — we would be very likely to pay either very large dividends or none at all, because our test is whether we think we can use money at a rate — in a way — that it creates more than a dollar of market value for every dollar we retain.
Obviously, if we can keep a dollar and it becomes, on a present-value basis, worth more than a dollar, it’s foolish to pay it out.
Forget all about taxes. Assume it’s a tax-free society. We would have exactly the same dividend policy up to this point, whether there was any tax on dividends, capital gains, or anything else, or whether we were entirely tax-free.
Because we have retained money because, to date, we have felt that if we keep a dollar and use it in buying other businesses, or whatever it may be, that it becomes worth more than a dollar on a present-value basis — I mean, not that it’s going to be worth a dollar-ten four years from now — but that it’s worth more than a dollar when we look at what it’ll be four years from now.
That’s subjective, but any given decision like that is subjective. Over time, you get an objective test as whether that’s met by — whether we do indeed create more value than — each dollar retained earnings, we create an extra dollar-plus of value.
If that changed — and it could change — then we would give the money to the shareholders. And it might be done through repurchases or it might be done through dividends, but we would — there’s no reason to keep a dollar in the business that’s worth 90 cents if you keep it in the business.
And there are companies that do that, but they don’t — they’re not necessarily intentionally doing it. They may have higher aspirations as they go along, but they’re not realized.
We, I think, would be fairly objective about trying to figure out whether we are indeed creating value or destroying value by retaining earnings.
We would never have a conventional dividend policy. I mean, the idea of paying out 20 percent of your earnings, or 10 percent, or 30 percent of earnings in dividends strikes us as nuts. I mean, you may get yourself in a position where you have to do it because you build these expectations in people’s minds, but it is — there is no logic to it whatsoever.
The logic is basic. If you create more than a dollar value for a dollar retained, why in the world would you pay it out, because the people who want to get that dollar as a dividend can instead get a dollar-ten by selling the stock for — or whatever it may be — a dollar-twenty— for the value that was maintained — or retained.
So, that — it’s a very simple dividend philosophy, and one, I think, that’s in one of the past annual reports. We explain the logic of it. And I see no — nothing that would change, in terms of the principles of it.
Evaluating whether that’s the case — I mean, obviously we aren’t going to make a decision every week based on whether we can employ money that week at a higher rate of return, or every month.
But in terms of a reasonable expectancy over a couple-year period, whether we think we can use retained earnings advantageously, that’s our yardstick.
CHARLIE MUNGER: Yeah, what’s interesting about what Warren is saying about logical dividend policy is that if you went to all the leading business schools of the United States, all the leading economics departments, all the professors of corporate finance — this wasn’t — wouldn’t be the way they teach the subject.
In other words, we’re basically saying we’re right and all the rest of academia is wrong. (Laughter)
WARREN BUFFETT: We love it when we do that. (Laughter)