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Buffett Faces Sokol, Dividend Questions

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. We're here at the lunch break of the Berkshire Hathaway Annual Shareholders Meeting for 2011.

I'm here with Gregg Warren, Berkshire analyst, and Paul Larson, equity strategist and editor of Morningstar StockInvestor. They're going to give me their take on the first half of the Q&A and any insights that they gleaned from what Buffett and Munger had to say.

Thanks for joining me, guys.

Gregg Warren: Thanks for having us.

Paul Larson: Thanks for having me.

Stipp: So, first question for you: Buffett talked a little bit about their first-quarter results. He mentioned that it was a bad catastrophe year. He said that in 2011 they might actually have a underwriting loss because of that. What's your takeaway from the catastrophe results, Paul?

Larson: Well, they were quite large. The silver lining is that usually when we have a large catastrophe year that the pricing on insurance does indeed go up. So, I would expect next year will be a much better year, all else equal, just because of the pricing increase, as well as the fact that we should have a reversion to mean. This was a very, very bad year.

Stipp: Gregg, did anything jump out at you from the results that you saw from the first-quarter numbers that he showed?

Warren: I thought the losses in Japan were a bit higher than what we were anticipating, so I'm curious to see the results when they do come out, and be able to dig into there and figure out where the exposure really was for that.

Australia and New Zealand were kind of known events, and they also made note of the fact that with the tornadoes running through the South this past week, that's also going to weigh on the claims at GEICO.

I think, the more interesting point was the fact that GEICO's new policies have increased 50% year-over-year. That was pretty impressive.

Stipp: The question that was on everyone's mind before the meeting started, obviously, was the David Sokol incident. Buffett did say, "I made a mistake when I didn't ask Sokol, 'When did you buy this stock?'" Those words did come from his mouth, but I know that a lot of folks were listening for a lot of things. They wanted to hear a lot of things. Did you hear what you wanted to hear on this issue, Paul?

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Larson: I think so. He admitted that he made a mistake in the wording of the press release that came out, but he said that at the time, he thought that the goal had been met in terms of what he was trying to achieve, because there is certain wording that he had to use in the press release that he wanted Sokol gone, but he didn't necessarily want to word it strongly to open Berkshire up to liability and future lawsuits, and those sorts of things.

I think the issue was dealt with quite well at the meeting. There will be a transcript on the Berkshire Hathaway website detailing what Buffett and Munger said here today, which is a shareholder meeting first, to have any sort of the meeting show up in a transcript, so we can review it later.

Stipp: Gregg, enough said or do you still need to hear more to be satisfied?

Warren: No, I think, it is satisfactory. I think, the press release that came out this week from the audit committee really shed a lot of light on what was going on.

I think, a lot people were just worried that he wasn't being ruthless, and I think he spent some time talking about how they were still being ruthless, but it's not necessarily the way you would think it to be. The fact that Sokol is gone and they're not tied up in lawsuits …

Larson: ... and they also didn't have to write a big check in terms of the severance.

Warren: And it's just sort of being able to put that to bed without those hassles and all of that dragging on, while at the same time, bringing all this out into the light of day for the public to see, for the SEC to see, he did point that out several times. So, I think that in that sense, they are being ruthless in their own way.

Stipp: Guys, big question that's not related to Sokol, so we can get off that topic for a moment, dividends.

Buffett said that the day that Berkshire pays a dividend, it's like saying that he's not going to be able to make the returns that he had made before. The stock could probably go down. But he did say interestingly that they may pay a dividend someday. What did you think about his take on dividends, Paul?

Larson: Well, I thought it was very interesting because this is the first time that I recall Buffett ever acknowledging that there will probably be a day eventually when Berkshire will indeed pay a dividend. It's probably not right around the corner, but again it's the first time that we've heard a positive affirmation that a dividend is likely coming.

Stipp: Gregg, he made it seem like it's an all-or-nothing thing. Buffett said, "when I pay a dividend it means that we're not going to be able to invest the money the same way we've invested it in the past." My question for you is, is there a middle ground here, where they can say, "look, we can't put all this money to use. We're going to pay a dividend. But we can find some opportunities for some of this money to still make a pretty reasonable return"?

Warren: That's my exact thought on the whole thing. He even pointed this out: the day that they start paying a regular dividend, that is sort of an admission that the cash flows that they're generating, they can't reinvest back in the business at a rate of return that they have historically. So that's problematic for the stock longer term when that does happen, but I still think the door is open potentially for them to pay a special dividend.

If you get to the end of this year, and they've got $50-$60 billion in cash sitting on the books, potentially Berkshire could turn around and say, "listen, we're going to pay this out, this one-time special dividend because we've got enough cash on the books to run the firm the way we want to. We've had additional cash available for investments that we're still working on, but we've got this excess cash that we think we should just return to shareholders." And I think that would potentially build a lot of goodwill with shareholders as well.

Stipp: All right, guys--thanks for joining me today and for your insights on the first half of the meeting. For more insights. Check out Morningstar.com's live blog of the Berkshire Hathaway event. We'll be checking in after the meeting to get the final roundup from Paul and Gregg. Thanks for watching.