How Warren Buffett’s Berkshire Hathaway shareholder letter could lift the company’s shares

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As Warren Buffett prepares to put an end to his long-awaited annual letter to

Berkshire Hathaway

shareholders, the CEO has a lot to deal with.

They include the low performance of Berkshire shares (brand: BRK.A and BRK.B) over the past one, five and ten years, Buffett’s cautious approach to new investments and the irregular record of Berkshire acquisitions. during the last decade.

However, this letter, which will be published on February 27, along with the annual report and fourth-quarter earnings, may help draft Berkshire’s next chapter. All you would need is an announcement of the start of a dividend.

A 2% dividend would be a good start, which would account for about 40% of projected earnings for 2021. It would likely raise stocks by expanding the base of potential investors to those who want or need dividends.

Berkshire has stepped up share buybacks, buying $ 15.7 billion in shares during the first three quarters of 2020, or about 3% of the outstanding shares. But with $ 146 billion in cash and a projected profit of $ 25 billion this year, it has the ability to pay a dividend and recoup shares.

“Berkshire should pay a dividend; this would increase the attractiveness of stocks for investors who want current income, “says David King, co-manager of the Columbia Flexible Income Capital fund.” Given Berkshire’s size and financial strength, the company is unique in not paying dividends. that should change “.

Berkshire has not paid any dividends for more than 50 years. Because? Buffett’s view has been that a dollar in his hands is better than one in the hands of shareholders. It has been a long time since Buffett worked with his investment and acquisition magic, but it has been less true in recent years. Buffett declined to comment on this article.

In his 2012 annual letter, the CEO addressed the issue of dividends, arguing that the best and most tax-effective approach would be for investors who want revenue to sell a small portion of their Berkshire shares each year.

“First of all, dividends impose a specific liquidation policy on all shareholders. If, for example, 40% of profits are politics, those who want 30% or 50% will be frustrated, “Buffett wrote.” Our 600,000 shareholders cover the boardwalk in their cash wishes. However, it is safe to say that many of them (perhaps even most) are in a network saving mode and, of course, should not prefer any payment.

In 2014, Berkshire holders overwhelmingly rejected a proposed dividend representation.

E = Estimate

Sources: Bloomberg, Edward Jones

However, Berkshire’s numbers have doubled since then, says Edward Jones analyst James Shanahan, who favors the dividend. “A dividend is a good idea, just because the cash balance has grown a lot,” he says, adding that significant repurchases in Berkshire are more difficult than in other large companies because there is less liquidity in the shares.

Berkshire’s Class A shares have lagged behind

S&P 500 Index

by 40 percentage points since the end of 2018. They now look attractive at around $ 368,000, less than 1.3 times the estimated book value at the end of 2020 of about $ 287,000 and about 23 times the projected earnings for to 2021. Its Class B shares are trading at around $ 243.

Berkshire has traded closer to 1.4 times the book value in the last five years and profits will increase in 2021, thanks to companies with an improving economy, such as the Burlington Northern Santa Fe Railroad.

Still, the last decade has been one of the missed opportunities for Buffett, with his involvement

apple

(AAPL) the notable exception. While the recently revealed big purchases in

Verizon Communications

(VZ) i

Chevron

(CLC) made waves, Berkshire was probably a net seller of about $ 9 billion of stocks last year. The company also did not take advantage of market turmoil or make large acquisitions.

So what else could Berkshire shareholders expect from the annual letter? More outreach would help. It is difficult to know exactly the performance of Precision Castparts and other large Berkshire companies because the company does not open its results.

There’s also the issue of succession, with Buffett turning 90 last August. Buffett could step down as CEO of Berkshire Vice President Greg Abel while remaining president and continuing to oversee Berkshire’s investment portfolio, including $ 270 billion in shares.

Berkshire has not named an apparent heir to Buffett, but it is assumed that it is Abel, 58, who oversees Berkshire’s vast non-insurance operations, including Burlington Northern.

This would give Abel an important experience while Buffett is still on the scene, which will allow Abel to take new steps, such as celebrating Berkshire’s first investment day.

And whether Abel or someone else, a dividend would remove pressure from Buffett’s successor to reinvest the Berkshire profit torrent and align the conglomerate with most other giant companies.

Write to Andrew Bary to [email protected]