Best Section of Warren Buffett’s Annual Letter to Berkshire Hathaway Shareholders: Why Buybacks Are Preferred Over Dividends

This weekend I had the pleasure of reading Warren Buffett’s annual shareholder letter (an annual exercise for me) and I wanted to share a section of the 23 page document with my readers. In it, Buffett discusses why he prefers share buybacks over dividends (Berkshire has never paid a dividend). Not only did he present a clear and concise explanation, but I also think it sheds much light into the current debate at Apple, where shareholders are hoping that management there finally makes some wise capital allocation decisions, as the stock hits a new 52-week low today. I have created a PDF file consisting of just the 3 page section on dividends versus buybacks if you would like to read it.

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4 Thoughts on “Best Section of Warren Buffett’s Annual Letter to Berkshire Hathaway Shareholders: Why Buybacks Are Preferred Over Dividends

  1. He never said he preferred buybacks over dividends. He presented a very limited example – one with key assumptions, i.e. a stock that always trades at 25% over book, a mananger that’s able to allocate capital at a certain rate of return. ONLY UNDER THOSE CIRCUMSTANCES would WB prefer buybacks over dividends…not in ALL CASES as you seem to imply.

    It was a simplified example, a model, used to illustrate a point.

    • Chad Brand on March 4, 2013 at 5:40 PM said:

      Obviously he was writing about Berkshire specifically and I purposely linked to the text so as to not put words in his mouth. If your takeaway from what he wrote in his letter is that he does not prefer buybacks over dividends, then we will have to agree to disagree. You are right that he does not endorse buybacks in every single instance (he made a point to say that price means everything and one should not overpay for shares), but we can still make a generalization. And the assumptions he used (12% ROI, 1.25x book value) apply to most public companies, as he also pointed out, so it is not a set of narrow assumptions that would rarely apply. He also discussed other considerations like tax consequences and letting shareholders decide the timing of when they cash out a portion of their holdings, which are universal with all companies. Lastly, he mentioned today on CNBC that he told Steve Jobs to do a buyback, not a dividend, when they spoke of the topic several years back. The caveats? The stock had to be undervalued and the cash had to be excess in nature. Same situation applies today.

    • Yeah he doesn’t endorse buybacks all across the board, but I think it is clear. And I think he is right. Great little section of that letter, thanks for sharing

    • Yes the problem is, that most companies, when buying back shares, do it at too high a price; they rarely buy back shares at low prices; in which case WB’s rationale is the same but the conclusion is in fact the direct opposite: dividends are better than buybacks.

      It’s a pretty inaccurate generalization to say that WB meant that he prefers buybacks over dividends in ALL or even MOST cases.

      As for Apple, the reason why he ASKED Steve Jobs is because WB doesn’t know (most people don’t, I certainly don’t) Apple’s intrinsic value, hence it’s impossible to know whether a dividend or buyback is more appropriate.

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