At the annual shareholders meeting Buffett said that dividends could be paid to shareholders “reasonably soon, even while I am around,” in what would be a stunning about-face in dividend policy.
Since Buffett took over Berkshire Hathaway, it has paid only one dividend of $0.10 per share, which was paid in 1967. A dividend would be very big news, since Buffett has long argued that a dollar retained and reinvested by Berkshire Hathaway has created more value for shareholders due to Berkshire’s historical investment record.
Paying a dividend would be a simple admission that after a run that lasted more than 50 years, market-beating investment opportunities are no longer available in sufficient size.
An unique way to look at Berkshire’s cash
In the question and answer session, Buffett referred to cash as a business that effectively sells for more than 100 times earnings because Berkshire earns less than 1% on the cash it holds on its balance sheet. Munger quipped that it was even worse after taxes. Looking through this lens, cash is perhaps the “investment” furthest away from Buffett and Munger’s value investing philosophy of buying good businesses at reasonable prices.
The company’s cash problem will only grow bigger if Berkshire doesn’t find new ways to deploy capital. Buffett looked forward three years to explain that with no new big investments, Berkshire could have as much as $150 billion in cash to deploy in 2020.
Buffett said that over the next decade, Berkshire may actually invest more than it has during its entire corporate history leading up to that point.
Buffett went on to note that he’d have a hard time explaining Berkshire’s vast cash holdings as being smart for shareholders as time goes on, but said that it’s possible that a decline in stock prices would give the company the ability to put more money to work.
Swinging for the fences
Berkshire Hathaway is on the hunt for a megadeal acquisition. Earlier this year, Buffett played a role in Kraft Heinz‘s $143 billion offer for Unilever, but that even this massive transaction wouldn’t have made much of a dent in Berkshire’s cash. At best, it was a way to put about $15 billion of Berkshire’s capital to work, Buffett said at the annual meeting.
Finding an investment large enough to drain its cash pile won’t be easy. When asked, Charlie Munger said that Berkshire has the capacity to invest as much as $150 billion (partly financed by new debt) to acquire businesses. Buffett laughed, and said that Munger may have been a little optimistic, but that they were eager to do a very big deal if one were to appear.
With more than $90 billion in cash and an unwavering promise to keep about $20 billion in cash for potentially large reinsurance losses in its insurance portfolio, one can make the case that Berkshire Hathaway easily has at least $70 billion to work with, a sum that will likely grow at $20 billion or more in every year in which the Oracle of Omaha doesn’t strike on a big acquisition.
But if it fails to find a business it likes well, Buffett may have to settle for buying his own business (repurchasing shares) or paying a dividend, a tacit admission that Berkshire Hathaway may have simply grown too large to make above-average investment decisions in a big way.