Buffett Prefers Dividends, Yet Berkshire Opts for $27B Buybacks

Key Takeaway

• Despite Warren Buffett's preference for dividend-paying stocks, Berkshire Hathaway does not pay dividends, focusing instead on reinvesting capital and share buybacks.
• Berkshire shareholders have shown strong support for this strategy, overwhelmingly voting against a dividend proposal in 2014.
• In 2021, Berkshire spent a record $27 billion on buybacks, underscoring its commitment to returning value to shareholders through means other than dividends.

Berkshire's Dividend Strategy

Warren Buffett, the CEO of Berkshire Hathaway, is renowned for his investment acumen, particularly his preference for dividend-paying stocks. Despite this, Berkshire Hathaway itself does not pay dividends to its shareholders. The conglomerate, sitting on tens of billions in cash, has historically opted against distributing regular dividends. Buffett's rationale is rooted in his confidence in reinvesting capital more effectively within the company or through share buybacks, which he believes offer greater benefits to shareholders. In a 2018 CNBC interview, Buffett expressed a preference for repurchases over dividends, citing the flexibility and value they offer to shareholders without the commitment implied by regular dividends.

Historical Context and Shareholder Sentiment

The only instance Berkshire Hathaway paid a dividend was in 1967, a decision Buffett humorously regrets, suggesting it was a "terrible mistake." This sentiment was echoed in a shareholder vote in 2014 regarding the initiation of a "meaningful annual dividend." Both classes of Berkshire shareholders, Class A and Class B, overwhelmingly voted against the proposal, with Class A shareholders voting no by a margin of 89 to 1 and Class B shareholders by 47 to 1. This vote underscores the trust Berkshire's investors place in Buffett's judgment and their preference for the company's capital allocation strategies over receiving dividends.

Buyback Program and Investment Philosophy

Berkshire Hathaway initiated a buyback program in 2011, which has become a significant method for the company to return capital to shareholders, especially during periods of competitive deal-making environments and high stock market valuations. In 2021, Berkshire spent a record $27 billion on buybacks, reflecting Buffett's difficulty in finding suitable external acquisition opportunities. This approach aligns with Buffett's investment philosophy, which prioritizes the efficient use of capital to generate long-term value for shareholders. The top holdings in Berkshire's equity portfolio, including Apple, Bank of America, Coca Cola, Chevron, and American Express, all pay dividends, further illustrating Buffett's favor towards income-generating investments.

Management Quotes

• Warren Buffett:

  "Dividends have the implied promise that you keep paying them forever and not decrease them... we would probably lean toward repurchase." "It was a terrible mistake... I always tell people that I’d gone for the men’s room and the directors voted while I was gone. But that isn’t true. I was there, I confess." "I think they expect us to do whatever we think makes sense for all shareholders... And obviously, if we really thought we never could use the money effectively in the business, we should get it out, one way or another."