Warren Buffett doesn’t like dividends. Or does he?
The legendary investor’s Berkshire Hathaway doesn’t pay its holders a dividend, preferring to maintain its substantial cash hoard as dry powder for future investments.
At the end of 2017, Berkshire held $116 billion in cash and U.S. Treasury bills, up from $86.4 billion at year-end 2016. And given Mr. Buffett’s superior record of buying profitable companies at reasonable prices, few would venture to argue that the policy is in error.
But the Omaha-based holding company certainly collects lots of dividends. Last year, Berkshire took in $3.7 billion in dividends from its stock portfolio. Directly, or through its various operating units, Berkshire owns stocks of numerous major dividend payers.
As of the end of 2017, its 12 largest equity investments were all dividend payers. Berkshire’s 13F forms, also from Dec. 31, show holdings of 45 domestic stocks and U.S-traded ADRs. Of those stocks, 35 pay dividends. That 78% payer ratio isn’t that far off the 82% of S&P 500 issues currently paying dividends. And four of the 10 non-payers in Berkshire’s holdings are classes of John Malone’s Liberty Global telecommunications and media business. If those were counted as one firm, 83% of Berkshire’s equity investments pay dividends.
The company’s five largest equity positions as of the end of December (Apple, Wells Fargo, Bank of America, Kraft Heinz, and Coca-Cola) delivered close to $2.8 billion in dividends in 2017 to Berkshire Hathaway.
Buffett recently increased his company’s ownership of Apple stock by 75 million shares. On May 1, Apple boosted its cash dividend by 10 cents, or 16%. That moved it ahead of ExxonMobil to become the largest U.S. dividend payer, at a current distribution of $14.8 billion annually. The extra dime in Apple dividends means that Berkshire Hathaway will get $72 million in additional cash by the end of the year.
Since Berkshire Hathaway has not announced that it will return any of the cash payments it gets from stock investments, we can assume that Warren Buffett likes to receive dividends. He just believes that he has better uses for the cash than to pay dividends.
So far, he has been right and his investments, for the most part, have paid off handsomely. From 1964 through 2017, Berkshire’s market value has compounded at a rate of 20.9% annually. That compares with a 9.9% annualized total return for the S&P 500 index.
The vast majority of corporate CEOs lack Mr. Buffett’s skill in evaluating investment opportunities. Consequently, investors and their advisors should be happy when corporate boards pay shareholder dividends.
In the large-cap S&P 500, most sectors have 90% or more of the constituent companies in the payer column.
The telecommunications services sector has 100% payers, but that is a bit misleading as there are only three companies in that sector. Despite Apple, only 65% of information technology companies in the S&P 500 pay a dividend. Health care comes in last among sectors in the index with only 55% of companies paying.
But IT does punch above its weight. At the end of the first quarter, the sector contributed 16.3% of the S&P 500’s dividend, up from a 10-year average of 11.7%.
Of the fabled FAANG stocks (Facebook, Amazon, Apple, Netflix and Google, now Alphabet), only Buffett’s pick pays a dividend. We can’t say that the dividend prompted Berkshire Hathaway to invest in Apple. Maybe Warren Buffett simply likes their business model and long-term prospects. But the extra cash into Berkshire’s till probably didn’t hurt.
Disclosure: The writer owns shares of Apple.