How Warren Buffett’s letter to Berkshire Hathaway shareholders could raise the company’s stock

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As Warren Buffett prepares to put the finishing touches on his long-awaited annual letter to

Berkshire Hathaway

shareholders, the CEO has a lot to deal with.

They include the poor performance of Berkshire shares (ticker: BRK.A and BRK.B) over the past one, five and 10 years, Buffett’s cautious approach to new investments and Berkshire’s uneven history of acquisitions over the past decade.

Still, this letter – which will come out on February 27, along with the fourth quarter’s annual report and earnings – may help write the next chapter in Berkshire. All you need is an announcement of the start of a dividend.

A 2% dividend would be a good start, representing around 40% of the projected profits for 2021. It would probably increase the stock, expanding the potential investor base for those who want or need dividends.

Berkshire stepped up share repurchases, repurchasing $ 15.7 billion in shares in the first three quarters of 2020, or about 3% of the outstanding shares. But with $ 146 billion in cash and projected earnings of $ 25 billion for this year, it has the ability to pay dividends and repurchase shares.

“Berkshire must pay dividends; this would increase the stock’s appeal to investors who want current income, ”said David King, co-manager of the Columbia Flexible Capital Income fund. “Given Berkshire’s size and financial strength, the company is unique in not paying dividends and that must be changed.”

Berkshire has not paid dividends for more than 50 years. Why? Buffett’s view is that a dollar in your hands is better than one in the hands of shareholders. That was the case, while Buffett worked on his investment and acquisition magic, but it has been less true in recent years. Buffett declined to comment for this article.

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

“First of all, the dividends impose a specific policy of withdrawing money to all shareholders. If, say, 40% of earnings is politics, those who want 30% or 50% will be frustrated, ”wrote Buffett. “Our 600,000 shareholders cover the coast in their desire for money. It is safe to say, however, that many of them – perhaps even most of them – are in a net saving mode and should logically not prefer any payments. ”

In 2014, Berkshire holders overwhelmingly rejected a proposed dividend power of attorney.

E = Estimate

Sources: Bloomberg, Edward Jones

Still, Berkshire’s cashier has more than doubled since then, notes analyst James Shanahan of Edward Jones, who prefers dividends. “A dividend is a good idea just because the cash balance has grown so much,” he says, adding that significant repurchases at Berkshire are more difficult than at other large companies because there is less liquidity in their shares.

Berkshire’s class A shares lagged behind the

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 around $ 287,000 and about 23 times the projected earnings for 2021. Its class B shares trade around $ 243.

Berkshire has traded close to 1.4 times the book value in the past five years, and profits are expected to rise in 2021, thanks to businesses exposed to an improving economy, such as the Burlington Northern Santa Fe railroad.

Still, the past decade has been one of missed opportunities for Buffett – with participation in

Apple

(AAPL) the notable exception. Although the recently released large purchases in

Verizon Communications

(VZ) and

Chevron

(CVX) made waves, Berkshire was probably a net seller of about $ 9 billion in shares last year. The company also failed to capitalize on the market turmoil and make major acquisitions.

So what else can Berkshire shareholders expect to see in the annual letter? More disclosure would help. It is difficult to know exactly how well Precision Castparts and other large Berkshire companies are doing because the company does not disclose its results.

There is also the issue of succession, with Buffett turning 90 in August. Buffett could step down as CEO to Berkshire vice president Greg Abel, while remaining chairman 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 widely assumed to be 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, allowing Abel to take further steps, such as potentially maintaining Berkshire’s first investor day.

And, whether Abel or someone else, a dividend would take the pressure off Buffett’s successor to reinvest Berkshire’s stream of profits and align the conglomerate with most other giant companies.

Write to Andrew Bary at [email protected]