Sitting atop a cash pile of over $100 billion dollars, Warren Buffet is often asked why Berkshire Hathaway does not pay a dividend. The standard answer for the past thirty or forty years has been that Berkshire’s cash pile would be better spent on either acquisitions or share buybacks. While there is certainly truth to this statement, there is a bigger reason for the lack of a Berkshire yield.
Warren Buffett personally owns approximately 250,000 shares of Class A Berkshire stock. Often Buffett has been quoted as saying he has “never sold a share of Berkshire Hathaway.” If this is true, that would indicate that in the process of building up his multi-billion-dollar fortune, Buffett has never paid any income taxes on his Berkshire shares. Assuming Buffett does not, or has not, ever personally sold any Berkshire shares, that would mean he is not only a savvy investor but also the undisputed master of the unrealized gain.
Warren has often said he draws a yearly salary of $100,000 from Berkshire Hathaway. Assuming his Berkshire salary is accurate and he has little else for additional income coming in, it is likely that Buffett (a multi-billionaire) pays nearly the same amount of income taxes as you or I. A Berkshire dividend would be exceptionally detrimental to Buffett’s income tax bill. A quick calculation to demonstrate:
(all numbers very approximate for demonstration purposes)
Number of “A” shares owned by Buffett: 250,000
A 5% yield on Berkshire “A” shares for 1 year would yield (for Buffett) approximately: $4,087,500,000
A 20% capital gain tax on his dividend would result in a personal tax bill of approximately: $817,500,000
With Berkshire paying a 5% yield, not only would Buffett end up with a near $1 billion tax bill, he would also have to find a place to invest nearly $3 billion of his after-tax dividend income (every year). This clearly demonstrates why he prefers share buybacks over dividend payouts.
Buffett is a multi-billionaire and he certainly did not get there by accident. As a result of (arguably) the greatest (legal) tax avoidance scheme in the history of modern American business, Buffett has painted himself into a corner when it comes to the payment of a Berkshire dividend. Berkshire investors can pretty near be guaranteed Berkshire Hathaway will never pay a divided as long as Buffett is alive and holding his shares. We will, however, very likely see a Berkshire yield upon Buffett’s exit from the business world.