When $24 bn isn't enough

Warren Buffett's no-dividend policy on thin ice

Warren Buffett's stance against paying Berkshire Hathaway shareholders a dividend looks to be on thin ice. In his annual letter to shareholders the Sage of Omaha defended his long-held objection to cash payouts. But the firm performance over the past four years has been disappointing and Buffett reckons it won't match its glory days again. That's likely to increase the chances of a cash payout, whether from Buffett or his successor.

In his must-read missive, Buffett used a fair bit of ink to beat himself up about the "subpar" showing in 2012. He and his lieutenants created $24.1 billion of value for shareholders, but it wasn't enough to beat gains in the S&P 500 - a breach of the Oracle's code of success. If 2013 disappoints, Berkshire will, for the first time ever, lag the index over a five-year span. 

This has unnerved some of his friends, according to Buffett's letter, who are giving him grief about not paying a dividend. With $42 billion of cash sitting idle at the end of 2012, their impatience is understandable. Last month's $28 billion Heinz deal will only chew up $12 billion. He even admits there are very few potential deals left that would be large enough to boost returns. Better, surely, to give investors some cash back to invest elsewhere.

But for Buffett, issuing a dividend is akin to admitting failure. In his letter, he argues that selling just 3.2 per cent of stock each year should, over a decade, be more profitable - assuming Berkshire keeps delivering double-digit returns - than paying out a third of annual earnings over the same period as a dividend. 

Buffett has built up enormous clout with investors. But the more that subpar growth appears to be the direct result of scale - Berkshire had $73 billion to invest in 2012 compared with $39 million in 1970 - the more their faith is likely to falter. That's likely to be even more the case for Buffett's successor.

Perhaps Buffett is hoping that airing his thoughts will alleviate such concerns. He is even, for the first time, allowing a bearish analyst to take part in a panel at Berkshire's annual meeting in May. Of course, such openness may actually provide more grist for the dividend mill.