Berkshire Hathaway 2009 Annual Meeting Audience Question # 13

Why Berkshire is still not paying dividends

Warren Buffett:


Charlie Munger:

Can you reach that peanut brittle?

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… 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 (the audio in this part of the video is 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 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.

Take Wells Fargo. I think Wells Fargo’s going to come out of this mess way stronger. The fact that the stock at the bottom tick scared a lot of people, I think will prove to be a very temporary phenomenon.

Warren Buffett:

Yeah. Wells Fargo got down below… actually, ticked below $9 a share at a time when spreads on business were never better, when depositing flows were never better, when their advantage in relation of costs of funds versus other large banks had never been better.

But you know, in a market that was terrified, it… literally, I had a class meeting that day, and it was the only time any of those classes have ever got me to name a stock. But they actually pushed me.

And somebody there with a BlackBerry, or whatever those instruments are that they carry around these days, checked the price and it was below $9. And I said, if I had to put all my net worth in one stock, that would’ve been the stock.

The… their business is… you know, the business model is fabulous.

And it, you know, when would you get a chance to buy something like Wachovia, which had the fourth largest deposit base in the United States, and bring that in? And then start getting the spread on assets versus liabilities that Wells gets and build the relationships they have. It’s a great business opportunity.

Wells Fargo will be better off… unless they have to issue a lot of shares, which they shouldn’t… Wells Fargo will be a lot better off a couple of years from now, than if none of this had happened.

And I think that’s true of some of other businesses as well. But you… you know, you have to be prepared. You can’t let somebody else get you in a position where you have to sell out your position.

Leverage is what causes people trouble in this world. So you don’t… you never want to be in a position where somebody can pull the rug out from under you. And you also never want to be emotionally in a position where you pull the rug out from under yourself.

I mean, you don’t want to have other people force you to sell and you don’t want to let your own fears or emotions to cause you to sell at the wrong time.

I mean, why anybody sells Wells Fargo at $9 a share when they owned it at $25 and the business is better off, is one of the strange things about the way markets behave. But people do it. And they get very affected by looking at prices.

If they own a farm like I do, you know, 30 miles from here, they don’t get a price on it every day. You know, they…

I bought that farm 25 years ago. And you look to the production of corn. You look to the production of soy beans and prices and cost of fertilizer and a few things. And you look to the asset itself to determine whether you made an intelligent investment. You have your expectations about what the asset will produce.

But people in stocks tend to look at the price. So they let the price tell them how they should feel or… that’s kind of crazy in our view.

We think you should look at the business just like you’d look at the apartment house that you bought or the farm you want. They let the fact that a quote is available every day turn into a liability rather than an asset.

And all I would say there is you better go back and read chapter 8 of “The Intelligent Investor,” where it tells you how to think about the market (you can get a copy of the book here). And it will do you more good than learning what modern portfolio theory is all about.

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