And if it isn't apparent, here's Warren:
...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. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.That's point #9 of the Owner-Related Business Principles section of the Berkshire Hathaway Owners Manual from the 1999 Chairman's Letter.
We continue to pass the test, but the challenges of doing so have grown more difficult. If we reach the point that we can't create extra value by retaining earnings, we will pay them out and let our shareholders deploy the funds....
See also our May 2010 post "As close to a Transcript of the 2010 Berkshire Hathaway Shareholders Meeting as you're likely to find (BRK.A; BRK.B)" which among other links goes to MarketBeat's liveblog:
3:10 pm
by Erik Holm
But this question was a two parter, and the second half is interesting: what question are they surprised that they haven't been asked. Buffett has a great response. He says he would ask if the company will be able to effectively reinvest all the cash it generates back into the company.
3:10 pm
by Erik Holm
Then Buffett answers his own question: "There will come a time when we can not intelligently use 100% of the capital we generate internally," he said. "There is a limit...There comes a point where the numbers get too big."3:13 pm
by Erik Holm That's the clearest I've ever heard him say that eventually, at some point in the future, Berkshire will perhaps pay a dividend.
From Barron's
With cash pouring in, Warren Buffett's Berkshire Hathaway may do something big this year -- maybe even pay a dividend.
A flush Berkshire Hathaway is in its best shape ever and piling up cash so quickly that it could be sitting on close to $50 billion at its core insurance operation alone by year end, and might even begin paying a dividend. Berkshire's profit recovery, aided by some smart acquisitions and investments by CEO Warren Buffett -- notably its purchase of the Burlington Northern railroad -- has gone largely unrecognized on Wall Street, where Berkshire's Class A shares (ticker: BRKA), now trading around $121,000, haven't budged in nearly a year. Berkshire's Class B shares (BRKB) trade around $81; each equals 1/1500th of a Class A share.
Berkshire's operating profits are on track to hit a record $12 billion to $13 billion after taxes in 2011, up from an estimated $11 billion in 2010, buoyed by Burlington and many of the company's manufacturing and industrial units, whose earnings fell sharply during the downturn.
Combine that with the likely repayment of some lucrative investments in Goldman Sachs (GS), General Electric (GE) and other companies that Buffett made during the financial crisis, and Berkshire's insurance units could be holding $20 billion more by year end than the $30 billion they had on Sept. 30, 2010. (We focus on cash at Berkshire's insurance operations and not in other divisions because insurance cash is readily available for investment. Other units held about $3 billion in cash.) Berkshire's market value is $200 billion, fifth-largest in the U.S. stock market, behind only ExxonMobil (XOM), Apple (AAPL), Microsoft (MSFT) and Google (GOOG).
The flood of cash could prompt Berkshire to finally start paying a cash dividend in the next 12 to 18 months, particularly if the 80-year-old Buffett is unable to find what he calls an "elephant," or a large acquisition. Locating one could prove difficult, given rising asset and equity values, as well as Buffett's refusal to participate in corporate auctions. Buffett, who declined to comment to Barron's, also hasn't been thrilled by the stock or bond market in the past year, when Berkshire has been a net seller of stocks.
Buffett's fans think Berkshire shares look appealing, trading for a reasonable 1.3 times estimated year-end 2010 book value of $95,000 apiece, and that the stock could surpass its 2007 record of $149,000 within the next 12 months. Book value, or shareholder equity per share, may hit $105,000 by the end of this year, assuming a decent performance by Berkshire's famed equity portfolio, which was an estimated total of $62 billion at year-end 2010. Thus, the shares trade for just 1.15 times projected year-end 2011 book, providing significant downside support.
LONGTIME BERKSHIRE INVESTOR Whitney Tilson of T2 Partners pegs Berkshire's "intrinsic value" around $160,000 a share and sees it surpassing $170,000 by year end. To reach that lofty level, the stock would have to shake off investor concerns about Buffett's longevity and about Berkshire's sheer size. Intrinsic value is the discounted cash flow of Berkshire businesses....MORE
