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Where's Your Dividend, Warren Buffett?

Berkshire Hathaway is buying the Duracell Battery business from Procter & Gamble in a deal valued at about $3 billion, net of the $1.7 billion Procter is plowing into Duracell before closing. Berkshire will use $4.7 billion of its P&G stock to buy the unit.

But don’t expect Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) to use its cash pile to pay shareholders a dividend any time soon. In fact, even though Berkshire gets or demands a lot in the way of dividend payouts from other companies, the company itself has shunned paying a dividend on its shares since 1967.

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Berkshire has long sought  stocks with large dividends. Its top four investments pay dividends: American Express (NYSE:AXP), Coca-Cola (NYSE:KO), IBM and Wells Fargo. But Buffett’s eagerness for dividends goes beyond just taking stakes.

For instance, Buffett bemoaned the Federal Reserve’s restrictions on dividends in bailed out companies in his 2010 letter to investors (see here:

  • “The Federal Reserve, our friend in respect to Goldman Sachs, has frozen dividend levels at major banks, whether strong or weak, during the last two years. Wells Fargo, though consistently prospering throughout the worst of the recession and currently enjoying enormous financial strength and earning power, has therefore been forced to maintain an artificially low payout.”
  • “At some point, probably soon, the Fed’s restrictions will cease. Wells Fargo can then reinstate the rational dividend policy that its owners deserve. At that time, we would expect our annual dividends from just this one security to increase by several hundreds of millions of dollars annually.”

And Buffett applauded dividend increases in the same shareholder letter:

  • “Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.”

And Buffett shrewdly made investments that threw off sweet dividends in 2008 and 2009 at the height of the financial crisis. His Berkshire Hathaway invested more than $21 billion in Goldman Sachs and General Electric Co. (GE), Swiss Reinsurance Co., Dow Chemical Co. (NYSE:DOW) and Wm. Wrigley Jr. Co., extracting solid dividends for Berkshire and earning the company billions of dollars. Berkshire Hathaway also invested $5 billion in Bank of America, getting in return perpetual preferred stock with a 6% annual dividend.

In fact, in the first quarter of 2011, Goldman Sachs reported its bottom line was stung because it shelled out a $1.64 billion dividend to repay the $5 billion investment Warren Buffett's Berkshire Hathaway made in 2008.

Berkshire Hathaway and Buffett can lay the blame at the feet of shareholders who have rejected shareholder proposals to enact a dividend. But these are non-binding proposals that Berkshire and Buffett could ignore.

However, Buffett does seem to have hinted that Berkshire may pay dividends at some point in the future.

Specifically, Buffett was asked at the last shareholder meeting about returning capital to investors. He replied that his company is so big and throws off so much cash, that it’s difficult to find investments that will generate a decent return. “I think we can go out further than I thought 30 years ago,” Buffett said. “But there is a limit. There will come a time when we cannot intelligently use 100% of the capital we’ve developed internally. Whatever is in the best interests of the shareholders will be done at this point.”

Possibly optimistic about that sentiment, one shareholder proposal, which referred to shareholders as owners, just like Buffett does, demanded a dividend from the conglomerate: "Whereas the corporation has more money than it needs and since the owners unlike Warren are not multi-billionaires, the board shall consider paying a meaningful annual dividend on the shares.” The proposal was subsequently nixed.

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