2009: Will Berkshire pay a dividend?

CAROL LOOMIS: I promise you, this question did not come from Susan Lucci. However, it does concern dividend policy. It came from Peter Sargent of Yardley, Pennsylvania.

And to ask that, he quotes from principle number 9 of the “Owner’s Manual.” And Warren wrote there, quote:

“We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention over time delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met.” Now, this was written some time ago.

“We will continue to apply it on a 5-year rolling basis. As our net worth grows, it more difficult to use retained earnings wisely.”

So I’m now quoting the questioner here:

“The recent annual report made me think about the performance of both the company and the stock price. Berkshire seems to have done quite well in the past few years. But the stock price seems to have not quite kept pace.

“So I looked at the last five years of earnings per share. They’re on page 26 of the annual report. And they add up, in total, to $29,207.

“As you probably know, the closing price of Berkshire on December 31st, 2008 was 84,250. If you add the 29,207 per share of retained earnings to this, you come up with a, quote, ‘minimum market value of 113,457.’

“Since Berkshire closed on 12/31/2008 at 96,600” — oh, wait, I have read something wrong here.

“The closing price of Berkshire on 12/31/2003 was 84,250.

“And since Berkshire closed on 12/31/2008 at 96,600, and it’s been lower than that since, and is now around that now, it would seem that the market value has not increased for each $1 retained.

“Assuming my analysis is correct, it raises the question of whether or not Berkshire will pay a dividend in the coming year or not.”

WARREN BUFFETT: Well, we’ll now have a short quiz on that program — (laughter) — on the question.

The earnings, incidentally, of the 5-year period would include gains from things that were listed in unrealized appreciation at the end of the period.

In other words, some of those were actually built into the asset value at the time, but then become realized.

But the truth is if you take all of the money we earned in the five years, and the stocks, bonds, businesses purchased, and you sold them for cash on December 31st, 2008, we would not have — we would’ve had a loss on that, I mean, under the conditions that existed on December 31st, 2008.

I think that’s probably true of almost all capital programs that were (inaudible) — if you really measured it by what you could’ve sold, the businesses we bought — we love those businesses.

But there was no market to speak of for many businesses at that time. And security values were down significantly.

So I would say that he’s absolutely right, that measured on the value on December 31st, 2008, that the reinvested earnings had not produced a dollar market value at that particular market point.

Now, I would say this, that we also say we measure our business performance against the S&P. And we use book value as a conservative proxy for intrinsic business value.

We think intrinsic business value is higher, but we use that as a proxy. And we’ve done that consistently throughout the history of Berkshire.

And during that 5-year period — or during any — we’ve never had a 5-year period when we’ve under-performed the S&P, in terms of the — what I would call the intrinsic value measure of Berkshire.

And, as I said a few years ago, it’s — as we get larger, it’s much harder to do that, and we’ll settle for a couple of points better.

But so far, that test has been made — been met. And it’s been met while we reinvested all earnings.

So I think that we still have got the burden of — we still should have to prove by the fact that Berkshire will sell above the earnings we’ve retained. Berkshire sells above it — every dollar that’s been retained at Berkshire translates even today into more than a dollar of market value.

But I would certainly say that if you took the five years and just sold all the things we bought during that period at that price, that there would be a loss.

Charlie?

CHARLIE MUNGER: Yeah, I don’t get too excited about these oddball things that happen once every 50 years.

If you’re reasonably prepared for them and you’re dented a little on the bottom tick, and other people are suffering a lot more, and unusual opportunities are coming to you that you don’t see under other conditions, I don’t think we deserve any salt tears.