Berkshire Hathaway 2012 Annual Report Download - page 23

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The sell-off alternative, on the other hand, lets each shareholder make his own choice between cash receipts
and capital build-up. One shareholder can elect to cash out, say, 60% of annual earnings while other shareholders
elect 20% or nothing at all. Of course, a shareholder in our dividend-paying scenario could turn around and use his
dividends to purchase more shares. But he would take a beating in doing so: He would both incur taxes and also pay
a 25% premium to get his dividend reinvested. (Keep remembering, open-market purchases of the stock take place
at 125% of book value.)
The second disadvantage of the dividend approach is of equal importance: The tax consequences for all
taxpaying shareholders are inferior – usually far inferior – to those under the sell-off program. Under the dividend
program, all of the cash received by shareholders each year is taxed whereas the sell-off program results in tax on
only the gain portion of the cash receipts.
Let me end this math exercise – and I can hear you cheering as I put away the dentist drill – by using my
own case to illustrate how a shareholder’s regular disposals of shares can be accompanied by an increased
investment in his or her business. For the last seven years, I have annually given away about 4
1
⁄
4
%ofmyBerkshire
shares. Through this process, my original position of 712,497,000 B-equivalent shares (split-adjusted) has
decreased to 528,525,623 shares. Clearly my ownership percentage of the company has significantly decreased.
Yet my investment in the business has actually increased: The book value of my current interest in
Berkshire considerably exceeds the book value attributable to my holdings of seven years ago. (The actual figures
are $28.2 billion for 2005 and $40.2 billion for 2012.) In other words, I now have far more money working for me
at Berkshire even though my ownership of the company has materially decreased. It’s also true that my share of
both Berkshire’s intrinsic business value and the company’s normal earning power is far greater than it was in 2005.
Over time, I expect this accretion of value to continue – albeit in a decidedly irregular fashion – even as I now
annually give away more than 4
1
⁄
2
% of my shares (the increase having occurred because I’ve recently doubled my
lifetime pledges to certain foundations).
************
Above all, dividend policy should always be clear, consistent and rational. A capricious policy will
confuse owners and drive away would-be investors. Phil Fisher put it wonderfully 54 years ago in Chapter 7 of his
Common Stocks and Uncommon Profits, a book that ranks behind only The Intelligent Investor and the 1940 edition
of Security Analysis in the all-time-best list for the serious investor. Phil explained that you can successfully run a
restaurant that serves hamburgers or, alternatively, one that features Chinese food. But you can’t switch
capriciously between the two and retain the fans of either.
Most companies pay consistent dividends, generally trying to increase them annually and cutting them very
reluctantly. Our “Big Four” portfolio companies follow this sensible and understandable approach and, in certain
cases, also repurchase shares quite aggressively.
We applaud their actions and hope they continue on their present paths. We like increased dividends, and
we love repurchases at appropriate prices.
At Berkshire, however, we have consistently followed a different approach that we know has been sensible
and that we hope has been made understandable by the paragraphs you have just read. We will stick with this policy
as long as we believe our assumptions about the book-value buildup and the market-price premium seem reasonable.
If the prospects for either factor change materially for the worse, we will reexamine our actions.
The Annual Meeting
The annual meeting will be held on Saturday, May 4th at the CenturyLink Center. Carrie Sova will be in
charge. (Though that’s a new name, it’s the same wonderful Carrie as last year; she got married in June to a very
lucky guy.) All of our headquarters group pitches in to help her; the whole affair is a homemade production, and I
couldn’t be more proud of those who put it together.
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