The Warren Buffett Edition

2 Responses to The Warren Buffett Edition

1. Rob says:

   April 23, 2015 at 4:11 am

   I would like to ask for a correction. In the “The Warren Buffett Edition” episode of the Slate Money podcast, Felix Salmon has a 5+ minute lecture about the woes of Berkshire Hathaway not paying dividends. This discussion is patently incorrect. The nobel-prize-winning Modigliani–Miller theorem clearly states that paying dividends makes investors no better or no worse off. But Modigliani and Miller’s theorem does not take into account tax considerations; when we add taxes to the picture we find that paying dividends usually makes investors worse off (not better as Felix indicates), since dividends are generally taxed at a higher rate. In fact, there’s little economic justification for companies to pay dividends (as opposed to, say, buying stocks back); the seemingly irrational tendency for companies to pay dividends — despite the higher tax burden they impose upon investors — is known as the “dividend puzzle.” (For more on the dividend puzzle, see http://web.cenet.org.cn/upfile/46880.pdf or plug the search term into schoar.google.com.) Most financial economists, I believe, would argue that Berkshire Hathaway is actually one of the few rational companies that appreciates the costs that dividends impose upon investors.

   Felix’s concern that you can’t live off of stock if it doesn’t pay dividends is simply wrong. As an investor, I’m perfectly indifferent to receiving a $100 dividend or selling $100 worth of stock. Note, as long as the company keeps growing (and it will if it doesn’t pay dividends), I can sell $100 worth of my stock on a fixed basis forever, without loosing my stake in the firm (simulating the cash flows that I would have received had the firm paid dividends).

   I think this is an important correction. Few people truly understand the true value of a stock. The fact that a stock that never pays dividends can still hold value (in Berkshire Hathaway’s case $214,789 worth of value!) is a marvel of modern day economics. Furthermore, I believe the discussion unfairly cast Berkshire Hathaway in a negative light.
2. Rob says:

   April 23, 2015 at 4:29 am

   I guess that selling $100 worth of BH stock isn’t feasible, since a single stock is in the six figures. So the real problem isn’t the lack of dividends, but the absurdly high stock price. The firm is long overdue for some stock splits…

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