Warren Buffett and Charlie Munger are two of the finest
dividend investors to ever walk the planet.
Sound strange? It should. Buffett has famously eschewed
dividend payouts to
Berkshire Hathaway shareholders
while demanding fat yields from Berkshire's portfolio
companies.
"Unrestricted earnings should be retained only when there
is a reasonable prospect -- backed preferably by historical
evidence or, when appropriate, by a thoughtful analysis of
the future -- that
for every dollar retained by the corporation, at least
one dollar of market value will be created for owners,"
Buffett wrote in his 1984 letter to Berkshire
shareholders.
Buffett's billion-dollar secret ...
exposed!
The emphasis is Buffett's, not ours. But we heartily
agree. Businesses that don't pay dividends should have a plan
to produce massive returns with every dollar of retained
capital -- the sorts of returns Buffett and Munger have spent
decades delivering to their own shareholders.
Massive is too small a word to describe the gains. Let's
go with "ginormous" instead. Here's why: Buffett, Munger, and
their top-notch managers have engineered a 20% annual return
on Berkshire's per-share book value since 1965. All but three
of those years (1965 through 1967), the company retained all
earnings, paying no dividends.
Unfair, you say? Unethical? Name a multibillion-dollar
conglomerate that pays a 20% annual yield, and you can join
the chorus of sourpusses who demand that Buffett and Munger
pay a dividend. Let us know when you find one.
That's our money, pal
As we see it, Buffett's dividend policy is actually
a
boon for shareholders. He in effect
argues that we are bankers, entitled to a return on the
capital our portfolio companies borrow from us when we
invest. Dividends should be the default -- a to-be-expected
payment made in lieu of a proven history of capital
allocation skills.
In stark mathematical terms, this means capital allocation
laggards such as
Novell (Nasdaq: NOVL) and
JetBlue Airways (Nasdaq: JBLU) ought to be
paying dividends to their shareholders. Neither company has
returned even 4% on available capital over the prior 12
months.
Compare that with
Hansen Natural (Nasdaq: HANS) and
Varian Medical Systems (NYSE: VAR),
non-payers also. Yet each company has a history of producing
better-than-20% returns on capital.
Neither Buffett nor Munger are immune from this test.
Remember: Berkshire spent 1965-1967 paying dividends, and in
the ensuing decade would produce better-than-40% returns four
times in 10 years.
Dividends helped produce those returns, and they're still
helping Buffett and Munger today. Have a look at these juicy
yields on Berkshire's 10 largest holdings:
Company
Shares Held*
Yield
Estimated Annual Income
Coca-Cola
200,000,000
3.1%
$328 million
Wells Fargo
302,609,212
0.7%
$61 million
Burlington Northern (NYSE: BNI)
76,777,029
2%
$123 million
Procter & Gamble
96,316,010
3.1%
$170 million
American Express (NYSE: AXP)
151,610,700
2.1%
$109 million
Kraft
138,272,500
4.3%
$160 million
ConocoPhillips (NYSE: COP)
64,485,759 Continued... |