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By Jeremy Glaser and Greggory Warren, CFA | 04-25-2013 02:00 PM

Does Berkshire Have Too Much Cash to Not Pay a Dividend?

Buffett has limited opportunities to continue allocating capital within Berkshire at large returns, making it more difficult for the firm to not pay a dividend, says Morningstar's Gregg Warren.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. In Warren Buffett's most recent annual letter, he spent quite a bit of time talking about why he doesn't expect Berkshire to be paying a dividend anytime soon. I'm here today with Gregg Warren, one of our Berkshire analysts, to see if this makes sense for the company. Gregg, thanks for joining me.

Gregg Warren: Thanks for having me.

Glaser: So let's take a look about Buffett's discussion first in this letter. Can you walk through some of the examples, the math that he used, to kind of show why he just doesn't see a dividend payment coming anytime soon?

Warren: Well, it’s interesting that we're talking about the dividend again this year. It was pretty much a topic of conversation last year, as well. I think the biggest driver of that is the fact that they continue to build a lot of cash on the balance sheet. I think they had like $45 billion at the end of the December quarter. And if you back out what they've spent on Heinz, you're still looking at probably $35 billion to $37 billion left at the end of this quarter. And Buffett's always talked about having $20 billion in cash on hand to backstop the insurance business. So you're still talking about a sizable amount of cash sitting there that's earning nothing.

The question is: Is that the right strategy for Berkshire? Is that the right strategy for the shareholders? We've always expected to hear shareholders get a bit more vocal as time goes on, especially with that amount of cash sitting on the books. We think the fact that Buffett spent three pages out of the 24 pages that were in the annual letter talking through dividends and setting out some examples mathematically as to why it makes more sense for shareholders to just sell shares as opposed to Berkshire paying out a dividend signifies the sort of pressure that is out there for Berkshire to pay a dividend at some point.

The math that is laid out, if you walk through it, it does check out. It's probably not the best argument overall. I mean, the notion is shareholders with a dividend get the cash in hand now. They don't necessarily have to go through the issue of selling off shares or whittling down their stakes. So from that perspective, it's a bit difficult, and we expect there to be questions on this overall at the Berkshire annual meeting.

That said, we've always been of the belief that companies that can pay dividends, that don't have any good, adequate returning projects to put that money into, should be returning it back to shareholders in dividends and share repurchases. In Berkshire's case, they've been pretty much the exception that proves the rule. I think Warren Buffett has shown an exceptional track record of reinvesting those flows and that cash that's available to them in projects that return more than their own cost to capital. So it's a little bit harder. I mean, Buffett is sort of the exception here, but at the same time I think it's going to continue to be a topic.

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