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Berkshire Hathaway Inc. Message Board

  • jregdob jregdob May 16, 2003 4:20 PM Flag

    Warren to pay a dividend?

    If there are no tax issues, why not.

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    • The day BRKa starts paying dividends is the day I sell.

      • 1 Reply to woodstein2002
      • woodstein2002 writes (msg# 171348):
        "The day BRKa starts paying dividends is the day I sell."

        Great! You'll probably be selling to me! I hope all you "dividend haters" drive the price into the ground.

        Let's see, what WOULD Berkshire be worth today if it DID pay a dividend?

        Well, last year Warren said he had 100 million$ pretax a week flowing in from just the operating companies. That would be about 65 mil$/week after taxes (-35%) or 3,380 mil$ per year (*52 weeks) or $2,202 per "A" (/1.534934 million "A" equivalents on 3/31/2003). So last year's dividend could have been ~$2,200 per "A" if WEB had just written checks instead of retaining that cash for reinvestment purposes.

        Berkshire is a AAA credit, so let's discount the dividend by the yield on a AAA corporate bond. What's a AAA corporate bond paying?
        http: //www.bondsonline.com/asp/news/composites.html
        30-Year AAA Corporate Bond yield = 5.44% on 5/16/2003.

        And if WEB isn't retaining any of that free cash flow for reinvestment then real growth is probably going to be zip. But wait, there is always inflationary growth. Consider a small town barbershop. The barber has no real growth either. If he gave 4,000 haircuts last year he probably serviced ~4,000 customers/year a decade ago and ten years from now he'll probably still be averaging ~4,000 haircuts/year. But he can raise his price in line with inflation.

        Let's use the compound average growth rate in the CPI-U over the last five years to estimate the nominal growth rate.
        http: //www.bls.gov/cpi/home.htm
        5-Yr CAGR (CPI-U) = 2.49% (from 162.5 on 4/30/1998 to 183.8 on 4/30/2003).

        Now I need my trusty 20 year old hp12c calculator to calculate the present value of 100 years of dividends growing at 2.49% per year and discounted by 5.44% per year.

        [f] [CLEAR FIN] ... clears the financial storage registers.
        100 [n] ... 100 years of dividends.
        1.0249 [ENTER] 1.0544 [DELTA%] [i] ... stores 2.8783, the growth adjusted interest rate.
        2200 [PMT] ... last year's dividend.
        [PV] ===> -71,957 ... calculates the present value.

        So the free cash flow from the operating companies ALONE are worth ~72,000 $ per "A".
        Yesterday Berkshire closed at $73,550 (3/16/2003).

        "Clearly dividends determine value" - John Burr Williams (see msg# 170913).

        That would really make my day, a sell off on the day dividends commence.

        Yes, woodstein2002, I know what you really meant. Sorry to use you as a "foil" to make a point. As long as retained earnings grow at a rate greater than the discount rate reinvestment makes sense. But still, I would like to see Berkshire pay a dividend, even if it is a tiny one (with a correspondingly large growth rate). Come on, Charlie's WESCO does!

        jad

        PS: hp has a nice write-up on calculating the present and future values of an annuity that increases at a constant rate at equal intervals here:
        http: //h20015.www2.hp.com/en/document.jhtml?lc=en&docName=bpia5219

    • why pay a dividend if you can reinvest it at higher returns. all a div tax cut does is raise the return bar.

      SWUSC

 
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