Few people would accuse Warren Buffett of being hostile to shareholders of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). He's open, forthright, and doesn't pad his own pockets at the expense of investors. With a $100,000 salary and 21.4% stake in the largely financial conglomerate, Buffett does well when his shareholders do.
Yet, there's one area where he comes up short. As Buffett acknowledged in his most recent letter to shareholders, "A number of Berkshire shareholders — including some of my good friends — would like Berkshire to pay a cash dividend."
For those of you that follow Berkshire, it'll come as no surprise that Buffett isn't a stranger to dividends. By his own admission, he "relishes" the ones Berkshire receives from most of the stocks it owns. In 2012, its earnings included a staggering $1.1 billion in dividends from its "Big Four" investments alone: Coca-Cola, Wells Fargo, IBM, and American Express.
Despite this, Berkshire has only paid a dividend once, and that was more than 40 years ago. "I must have been in the bathroom when the decision was made," Buffett is often quoted as saying.
Buffett believes, and with good reason, that shareholders will benefit more from Berkshire's retention and reinvestment of the funds than they would if the company paid them out. His letter offered competing hypothetical examples of the impact on a shareholder's net worth under both scenarios. By paying dividends, he estimates that he'd reduce the company's compound annual growth rate by 4%.
So that's the end of that, right? Well, not so fast.
While there's little question that Buffett is arguably the world's best capital allocator, he's not going to be around forever. And when he's no longer in control of Berkshire, it seems unlikely that his replacement will be able to completely fill his shoes.
One of the things Buffett is known for is "deal flow." When companies like Bank of America or Goldman Sachs need a stamp of approval, as they both have over the last few years, they go to Buffett (and notably, not Berkshire) — though, to be fair, B of A's CEO Brian Moynihan said that Buffett came to him.
And what does Berkshire get in return? Money, that's what, and lots of it.
For its $5 billion investment in Goldman, which spanned a mere four and a half years, Berkshire took home $3.2 billion in profit. And its equally sized $5 billion investment in B of A could end up being even more lucrative given the accompanying warrants to purchase 700 million shares of the bank for $7.14 a share. At today's price, that equates to a profit of $3.7 billion; excluding the dividend payments Berkshire has and continues to receive on its preferred shares.
The point is that, while Berkshire may very well carry on being great, there's little reason to believe that it can be as great without Buffett as it has been with him. And it's for this reason that Buffett's anti-dividend policy may need to be updated while he's still at the helm.
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The Motley Fool's purpose is to help the world invest, better. Click here for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article, written by John Maxfield, originally appeared on fool.com.
