BERKSHIRE HATHAWAY: DIVIDEND POLICY PARADIGM
CASE STUDY SOLUTION
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SYNOPSIS
Berkshire Hathaway Inc. (Berkshire Hathaway), a goliath enterprise that had grown tremendously over a
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half century, had never paid a dividend. Warren Buffett, chairman of Berkshire Hathaway, advocated an
investment policy of reinvesting in existing assets, acquiring diversified assets, and buying back shares in
the company, but never paying a dividend. However, in 2017, with the company holding US$115.95 billion1
in cash and short-term reserves, the yield value on the cash balances was less than the inflation rate,
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effectively decreasing the real value of the reserves.2 The company was not finding suitable new
acquisitions, and shares in the company were trading above the company’s limit for repurchase. Amid
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public speculation, Buffett began musing that perhaps the best course of action for Berkshire Hathaway at
that point was to pay a dividend after all.3
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The case places students in Buffet’s position: armed with the rationale behind Buffet’s investment approach,
the history of Berkshire Hathaway’s growth through mergers and acquisitions, and the financial data
So
outlining the company’s growth and success, students must decide what the company should do and
whether it ought to change its investment policies.
LEARNING OBJECTIVES
After reading the case and completing the questions, students will understand
• Berkshire Hathaway’s dividend policy;
• the strategic use of share repurchase as an alternative to dividends; and
• the factors relevant to deciding whether to pay a dividend.
1
All amounts are in US$ unless otherwise specified.
2
Rupert Hargreaves, “Why Berkshire Hathaway Won’t Pay a Dividend,” NASDAQ, August 24, 2017, accessed June 15, 2018,
www.nasdaq.com/article/why-berkshire-hathaway-wont-pay-a-dividend-cm837027.
3
Ian Wyatt, “Warren Buffett Ready for 2018 Payout,” Wyatt Investment Research, August 19, 2017, accessed June 15, 2018,
www.wyattresearch.com/article/berkshire-hathaway-dividend-warren-buffett-ready-for-2018-payout.
The Case Solution Starts From page 5
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ASSIGNMENT QUESTIONS
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1. What type of dividend policy did Berkshire Hathaway adopt? Has the company appropriately followed
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the policy?
2. Is Buffet’s reasoning for preferring share repurchase valid?
3. Is a “homemade dividend” (selling a small portion of shares) a viable alternative to cash dividends for
the investor?
4. What factors should Berkshire Hathaway consider when deciding whether to pay a dividend? How will
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those factors affect the company’s decision?
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lu
So
ANALYSIS
1. What type of dividend policy did Berkshire Hathaway adopt? Has the company appropriately
followed the policy?
The first step is to understand what a dividend policy is and its types. Dividend policy is a corporate policy that
encompasses all the factors a company considers when deciding whether to retain profits or distribute them. The
The Case Solution Starts From page 5
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pl
3. Is a “homemade dividend” (selling a small portion of shares) a viable alternative to cash
dividends for the investor?
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A shareholder can earn income from equity shares by collecting dividends or by selling the shares. A cash
dividend—a disbursement of company profit in the form of cash—leads to a fund reduction for the
Sa
company. An alternative for shareholders is to sell equity shares: a “homemade dividend” that provides
proceeds from the sale of shares as a substitute for cash dividends. Selling shares for income saves a
company from needing to pay dividends to provide shareholders with income.
n
Buffet’s excerpts (see the case, “Dividend Policy”) advocate the use of homemade dividends as a viable
alternative to cash dividends. The shareholder can maintain an income and the company can take advantage
tio
of growth opportunities. Homemade dividends also allow each shareholder to draw an income customized
to the shareholder’s needs. Instead of the company paying cash dividends irrespective of a shareholder’s
income requirements, homemade dividends put the ability to create income in the hands of the shareholder.
lu
Thus, for investors, homemade dividends can fulfill their individual, personalized requirements for income
while sustaining the value of their investments—assuming the company uses the funds not paid out in
So
dividends to, instead, invest in growth opportunities.
The Case Solution Starts From page 5
, EXHIBIT -1: BUFFETT’S INVESTMENT SCENARIO (IN US$) A.
Dividend Payment Option
Year
0 10
Net Worth 2,000,000 4,317,850
Earnings 240,000 518,142
Dividend 80,000 172,714
Reinvested 160,000 345,428
Offer Value 2,500,000 5,397,312
Individual Share 1,000,000 2,158,925
Individual Value 1,250,000 2,698,656
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B. Share Repurchase Option
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The Case Solution Starts From page 5
CASE STUDY SOLUTION
e
pl
m
SYNOPSIS
Berkshire Hathaway Inc. (Berkshire Hathaway), a goliath enterprise that had grown tremendously over a
Sa
half century, had never paid a dividend. Warren Buffett, chairman of Berkshire Hathaway, advocated an
investment policy of reinvesting in existing assets, acquiring diversified assets, and buying back shares in
the company, but never paying a dividend. However, in 2017, with the company holding US$115.95 billion1
in cash and short-term reserves, the yield value on the cash balances was less than the inflation rate,
n
effectively decreasing the real value of the reserves.2 The company was not finding suitable new
acquisitions, and shares in the company were trading above the company’s limit for repurchase. Amid
tio
public speculation, Buffett began musing that perhaps the best course of action for Berkshire Hathaway at
that point was to pay a dividend after all.3
lu
The case places students in Buffet’s position: armed with the rationale behind Buffet’s investment approach,
the history of Berkshire Hathaway’s growth through mergers and acquisitions, and the financial data
So
outlining the company’s growth and success, students must decide what the company should do and
whether it ought to change its investment policies.
LEARNING OBJECTIVES
After reading the case and completing the questions, students will understand
• Berkshire Hathaway’s dividend policy;
• the strategic use of share repurchase as an alternative to dividends; and
• the factors relevant to deciding whether to pay a dividend.
1
All amounts are in US$ unless otherwise specified.
2
Rupert Hargreaves, “Why Berkshire Hathaway Won’t Pay a Dividend,” NASDAQ, August 24, 2017, accessed June 15, 2018,
www.nasdaq.com/article/why-berkshire-hathaway-wont-pay-a-dividend-cm837027.
3
Ian Wyatt, “Warren Buffett Ready for 2018 Payout,” Wyatt Investment Research, August 19, 2017, accessed June 15, 2018,
www.wyattresearch.com/article/berkshire-hathaway-dividend-warren-buffett-ready-for-2018-payout.
The Case Solution Starts From page 5
, e
pl
ASSIGNMENT QUESTIONS
m
1. What type of dividend policy did Berkshire Hathaway adopt? Has the company appropriately followed
Sa
the policy?
2. Is Buffet’s reasoning for preferring share repurchase valid?
3. Is a “homemade dividend” (selling a small portion of shares) a viable alternative to cash dividends for
the investor?
4. What factors should Berkshire Hathaway consider when deciding whether to pay a dividend? How will
n
those factors affect the company’s decision?
tio
lu
So
ANALYSIS
1. What type of dividend policy did Berkshire Hathaway adopt? Has the company appropriately
followed the policy?
The first step is to understand what a dividend policy is and its types. Dividend policy is a corporate policy that
encompasses all the factors a company considers when deciding whether to retain profits or distribute them. The
The Case Solution Starts From page 5
, e
pl
3. Is a “homemade dividend” (selling a small portion of shares) a viable alternative to cash
dividends for the investor?
m
A shareholder can earn income from equity shares by collecting dividends or by selling the shares. A cash
dividend—a disbursement of company profit in the form of cash—leads to a fund reduction for the
Sa
company. An alternative for shareholders is to sell equity shares: a “homemade dividend” that provides
proceeds from the sale of shares as a substitute for cash dividends. Selling shares for income saves a
company from needing to pay dividends to provide shareholders with income.
n
Buffet’s excerpts (see the case, “Dividend Policy”) advocate the use of homemade dividends as a viable
alternative to cash dividends. The shareholder can maintain an income and the company can take advantage
tio
of growth opportunities. Homemade dividends also allow each shareholder to draw an income customized
to the shareholder’s needs. Instead of the company paying cash dividends irrespective of a shareholder’s
income requirements, homemade dividends put the ability to create income in the hands of the shareholder.
lu
Thus, for investors, homemade dividends can fulfill their individual, personalized requirements for income
while sustaining the value of their investments—assuming the company uses the funds not paid out in
So
dividends to, instead, invest in growth opportunities.
The Case Solution Starts From page 5
, EXHIBIT -1: BUFFETT’S INVESTMENT SCENARIO (IN US$) A.
Dividend Payment Option
Year
0 10
Net Worth 2,000,000 4,317,850
Earnings 240,000 518,142
Dividend 80,000 172,714
Reinvested 160,000 345,428
Offer Value 2,500,000 5,397,312
Individual Share 1,000,000 2,158,925
Individual Value 1,250,000 2,698,656
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B. Share Repurchase Option
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Sa
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tio
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So
The Case Solution Starts From page 5
