Comment re. "Berkshire Hathaway as an Income Stock": BRK.B currently trades at around $400/sh, if my grandma has $10,000 of BRK.B and Buffett retires 1% of those total shares, how can my grandma sell BRK.B stock in order obtain an equivalent 1% ‘home made’ dividend of ($10000x0.01=)$100?
In order for at least 1 full share to equal 1% of a position in BRK.B that she can sell off, the position would need to be of size ($400/0.01=)$40,000. Even if my grandma was a real Berkshire fan-girl and BRK.B were a concentrated 10% of her portfolio, that would imply a total portfolio value of ($40000/0.10=)$400,000. (The median net worth of seniors only just approaches that number and is much lower for the median younger demographics and this is counting all assets, not just stock portfolios (https://www.cnbc.com/select/average-net-worth-of-americans-ages-75-and-up/)). Basically, there are a lot of not-unreasonable cases where a 'home made' dividend done in concert with company buybacks is simply not feasible for the average person once stock prices reach certain absolute dollar levels per discrete share.
(Maybe this would change if trading fractional shares of stock ever takes off, but that seems to be slow going).
But aside from this easy option, I don't think that Berkshire's dividend policy can or should be set based on the unique needs of very small shareholders. If Berkshire was to declare a regular 1% dividend to satisfy the scenario described, that would mean paying dividends of ~$9 billion per year, most likely incurring taxes for shareholders of $2-3 billion, assuming most shares are held in taxable accounts. In 2014 or 2015, there was a proxy vote on dividends. The overwhelming sentiment was to not pay dividends, even when excluding Warren Buffett's shares.
I was aware of Schwab's offering, but the thing is that Schwab only offers this for S&P500 companies (which does include Berkshire, while companies like Markel Corp at around $1400/sh or Biglari Hld. at $200/sh are left out). However, I wasn't aware (as I use Schwab), that this appears more broadly available at other brokers. (https://www.bankrate.com/investing/best-brokers-fractional-share-investing/).
So while this discussion is actually thus a bit moot, I'll just note on your second point that my comment was on your equivalence of buybacks and dividends in general (not on whether BRK's div policy is right or wrong, which is besides the point), as you mention that "there is no reason for investors requiring cash flow to restrict themselves to dividend paying stocks". This would not work for the average person were it not for brokers offering Stock Slices as I show in my previous comment --but again, this discussion is mostly moot as most brokers seem to offer this option in some capacity.
Fractional share trading is a positive innovation for very small shareholders. I think that is is unlikely that such individuals would implement a strategy similar to what I wrote about in "Berkshire Hathaway as an Income Stock" simply because most people with small portfolios would not be invested in individual stocks. In that article, I was writing with the mindset of the typical Berkshire Hathaway shareholder, especially those who have longstanding holdings with low cost basis and seeks cash flow from such holdings. In those cases, the "create your own dividend" option is definitely possible, for the majority of shareholders.
But more generally, corporate dividend policy must be set in a manner that makes sense for the majority of shareholders invested in a company, not for the convenience of those who have a very small number of shares.
This book (https://www.amazon.com/Ownership-Dividend-Daniel-Peris/dp/1032273194/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=) was published back in January, and while not an explicit examination of the rationale of dividends as a form of capital allocation, does make a reasonably interesting argument for why the 'cash nexus' (a terrible term, but basically the idea that investors' main benefit of owning stock in company will shift from being the retention/reinvestment of capital and enjoying principal appreciation, to principally a dividend-based relationship due to multiple appreciation being tapped out) will make a comeback over the next decade. Given your wide-ranging reading on the topic, it might be of interest to you. I'm not sure I agree with all points made, but found it an interesting history & a healthy alternative perspective to my own.
As always, thank you for the effort you put into your writing. Rational, indeed!
Hi, there are funds, institutions, and private investors, globally, who cannot or will not buy a non-dividend paying stock. The increased demand for the common should more than make up for the tax consequences of a small dividend. Especially for Buffett who has been a huge seller through the foundations since 2008 or so.
I would be surprised to see a regular dividend at Berkshire but it’s possible they could declare a very small one, supplemented by special dividends when warranted. Probably not while Buffett is there but Abel might do it. I’d like to keep capital allocation as flexible as possible.
Always good to read an informed rational assessment of the role of dividends, buybacks, acquisitions, and internal expansion in corporate capital allocation decisions. Corporate America would be much stronger if more CEOs made allocation decisions like Buffet, Singleton, et al. I wonder if it's a problem of incentives, knowledge/skill, regs/taxes, opportunity set, etc.
Warren Buffett has often made the point that most managers of Fortune 500 companies rose through the ranks based on their operational expertise in the business and know comparatively little about capital allocation. The Washington Post is a good example of a company with a great operational CEO who needed Buffett's guidance on capital allocation. As a result, Washington Post repurchased a large amount of stock in the 1970s at very low prices against the advice of the rest of the board of directors and the "experts" they employed. I don't think the situation has changed much since then.
Comment re. "Berkshire Hathaway as an Income Stock": BRK.B currently trades at around $400/sh, if my grandma has $10,000 of BRK.B and Buffett retires 1% of those total shares, how can my grandma sell BRK.B stock in order obtain an equivalent 1% ‘home made’ dividend of ($10000x0.01=)$100?
In order for at least 1 full share to equal 1% of a position in BRK.B that she can sell off, the position would need to be of size ($400/0.01=)$40,000. Even if my grandma was a real Berkshire fan-girl and BRK.B were a concentrated 10% of her portfolio, that would imply a total portfolio value of ($40000/0.10=)$400,000. (The median net worth of seniors only just approaches that number and is much lower for the median younger demographics and this is counting all assets, not just stock portfolios (https://www.cnbc.com/select/average-net-worth-of-americans-ages-75-and-up/)). Basically, there are a lot of not-unreasonable cases where a 'home made' dividend done in concert with company buybacks is simply not feasible for the average person once stock prices reach certain absolute dollar levels per discrete share.
(Maybe this would change if trading fractional shares of stock ever takes off, but that seems to be slow going).
Many brokers offer fractional trading, including Schwab:
https://www.schwab.com/fractional-shares-stock-slices
But aside from this easy option, I don't think that Berkshire's dividend policy can or should be set based on the unique needs of very small shareholders. If Berkshire was to declare a regular 1% dividend to satisfy the scenario described, that would mean paying dividends of ~$9 billion per year, most likely incurring taxes for shareholders of $2-3 billion, assuming most shares are held in taxable accounts. In 2014 or 2015, there was a proxy vote on dividends. The overwhelming sentiment was to not pay dividends, even when excluding Warren Buffett's shares.
I was aware of Schwab's offering, but the thing is that Schwab only offers this for S&P500 companies (which does include Berkshire, while companies like Markel Corp at around $1400/sh or Biglari Hld. at $200/sh are left out). However, I wasn't aware (as I use Schwab), that this appears more broadly available at other brokers. (https://www.bankrate.com/investing/best-brokers-fractional-share-investing/).
So while this discussion is actually thus a bit moot, I'll just note on your second point that my comment was on your equivalence of buybacks and dividends in general (not on whether BRK's div policy is right or wrong, which is besides the point), as you mention that "there is no reason for investors requiring cash flow to restrict themselves to dividend paying stocks". This would not work for the average person were it not for brokers offering Stock Slices as I show in my previous comment --but again, this discussion is mostly moot as most brokers seem to offer this option in some capacity.
Fractional share trading is a positive innovation for very small shareholders. I think that is is unlikely that such individuals would implement a strategy similar to what I wrote about in "Berkshire Hathaway as an Income Stock" simply because most people with small portfolios would not be invested in individual stocks. In that article, I was writing with the mindset of the typical Berkshire Hathaway shareholder, especially those who have longstanding holdings with low cost basis and seeks cash flow from such holdings. In those cases, the "create your own dividend" option is definitely possible, for the majority of shareholders.
But more generally, corporate dividend policy must be set in a manner that makes sense for the majority of shareholders invested in a company, not for the convenience of those who have a very small number of shares.
This book (https://www.amazon.com/Ownership-Dividend-Daniel-Peris/dp/1032273194/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=) was published back in January, and while not an explicit examination of the rationale of dividends as a form of capital allocation, does make a reasonably interesting argument for why the 'cash nexus' (a terrible term, but basically the idea that investors' main benefit of owning stock in company will shift from being the retention/reinvestment of capital and enjoying principal appreciation, to principally a dividend-based relationship due to multiple appreciation being tapped out) will make a comeback over the next decade. Given your wide-ranging reading on the topic, it might be of interest to you. I'm not sure I agree with all points made, but found it an interesting history & a healthy alternative perspective to my own.
As always, thank you for the effort you put into your writing. Rational, indeed!
Excellent article...clean and concise!
Hi, there are funds, institutions, and private investors, globally, who cannot or will not buy a non-dividend paying stock. The increased demand for the common should more than make up for the tax consequences of a small dividend. Especially for Buffett who has been a huge seller through the foundations since 2008 or so.
I would be surprised to see a regular dividend at Berkshire but it’s possible they could declare a very small one, supplemented by special dividends when warranted. Probably not while Buffett is there but Abel might do it. I’d like to keep capital allocation as flexible as possible.
Always good to read an informed rational assessment of the role of dividends, buybacks, acquisitions, and internal expansion in corporate capital allocation decisions. Corporate America would be much stronger if more CEOs made allocation decisions like Buffet, Singleton, et al. I wonder if it's a problem of incentives, knowledge/skill, regs/taxes, opportunity set, etc.
Warren Buffett has often made the point that most managers of Fortune 500 companies rose through the ranks based on their operational expertise in the business and know comparatively little about capital allocation. The Washington Post is a good example of a company with a great operational CEO who needed Buffett's guidance on capital allocation. As a result, Washington Post repurchased a large amount of stock in the 1970s at very low prices against the advice of the rest of the board of directors and the "experts" they employed. I don't think the situation has changed much since then.