Finance

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Investors don't have many qualms these days about how Berkshire Hathaway Inc. is run. How could they, right? But to ease the jitters that may crop up when Warren Buffett, 86, is no longer the boss, there are a couple of things his successor (Greg Abel? Ajit Jain?) could do. 

Road to Riches
As you can see, Warren Buffett clearly has no idea what he's doing*
Source: Bloomberg
*Sarcasm

The first I've already written about, and that's enhance Berkshire's transparency -- be it through regular earnings calls or increased financial disclosure, such as a deeper look at each unit's performance. That should be easy enough and would go a ways toward building trust with investors.

The second, though, is something that would stray a bit from the Buffett credo. It's to return more cash directly to shareholders -- i.e., pay a dividend. 

Buffett believes and has proven that shareholders generally earn a better return from his investment decisions (namely large acquisitions) than if those same funds had been used for dividends or share repurchases.

Cash Machine
Berkshire Hathaway's business operations consistently generate $7 billion or more of cash each quarter
Source: Bloomberg

Yet it's a prickly topic for Buffett. He devoted 2,000 words in his March 2013 annual letter to explaining, if not defending, his rationale for not paying a dividend (and a year later, shareholders voted in support of his viewpoint). There's only one time that he backpedaled, allowing Berkshire to make a small distribution. It was in 1967, and Buffett later said -- in his typical potty humor -- that he "must have been in the bathroom" when that decision was made. 

Still, I'm not talking about Buffett paying a dividend. I'm talking about a post-Buffett Berkshire, where there will be tremendous pressure to spend money as well as he has, finding the kind of fairly priced, "elephant-sized" acquisitions for which he and his business partner Charlie Munger, 93, are famous. A dividend may help the next CEO win favor with investors. It also lessens the burden and urgency of finding big acquisitions to make use of Berkshire's ever-expanding cash hoard, which is far less valuable sitting in a bank. 

Locked And Loaded
Even as Warren Buffett spends billions on acquisitions, stock market investments and assisting with 3G Capital's megadeals, cash continues to pile up at Berkshire Hathaway
Source: Bloomberg

Moreover, if CEO turnover were to be a near-term event, there's the fact that Berkshire -- along with many U.S. stocks -- is trading at an elevated multiple of earnings. 

If the "Buffett premium" gets tougher to justify under the next chief, instituting a dividend could help support the stock and appease investors who aren't likely to award the same kind of leeway given to Buffett when it comes to reinvesting their earnings. At the very least, it's a fallback option.

--With graphics assistance from Gadfly's Rani Molla

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It could perhaps also attract those funds that can't currently buy Berkshire shares because of mandates to invest in dividend-paying stocks.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net