Until Warren Buffett announced his deal to buy Burlington Northern late last year, Berkshire Hathaway (NYSE:BRK.A, BRK.B) had never split either its Class A or Class B stock. However, in order to make the deal palatable for Burlington Northern shareholders, he agreed to a 50-to-1 split of Berkshire's B shares, thus allowing smaller investors to receive those instead of the Class A shares that weren't split. Although Buffett's on record as being opposed to both stock splits and the use of stock to acquire companies, he broke these quasi-rules in order to make the deal a win/win for all shareholders. That's his brilliance. He's willing to bend the rules even if it means being contradictory.
IN PICTURES: World's Greatest Investors
Two more things Buffett frowns upon are dividends and share repurchases. Again, what he says and does are somewhat at odds with each other. In the case of dividends, Buffett believes paying them would do less for investors than capital appreciation of stock; his record speaks for itself. However, Berkshire receives approximately $1.3 billion annually in dividend payments from large investments in companies like Coca-Cola (NYSE:KO), American Express (NYSE:AXP) and Kraft (NYSE:KFT), demonstrating that what's good for the goose isn't necessarily good for the gander. If Buffett truly disagreed with dividends, he'd have no part of these companies and instead would become a growth investor. That's not happening anytime soon.
In 2000, Buffett wrote in his annual shareholder letter that Berkshire Hathaway would buy back its stock when the shares were intrinsically cheap and when it had the cash and borrowing capacity beyond that which was necessary to keep all its businesses operating. While this combination has never come to pass, he did admit in the same letter that there were times in the past where he should have done so. Again, talk is cheap. If he really felt strongly about share repurchases, he would have done something by now. I just don't think he sees the wisdom in playing this game. Having gone and said this, Murphy's Law suggests he'll probably turn around and buy back stock immediately. If he ever does, you can be darn sure the stock price will move higher on the announcement. (Depending on the situation, buybacks can be a good or bad sign for a company. Read 6 Bad Stock Buyback Scenarios for more insight.)
Buffett Might Agree
Offshore oil driller Transocean (NYSE:RIG) announced February 16 that it would pay a special dividend of $1 billion and repurchase up to $3.2 billion of its shares on the open market. Given that its shares are stuck in neutral, it's welcoming news. I'm a big fan of special dividends but generally against share repurchases. In Transocean's case, I'll let this pass because by my calculations, the last time it did a major share repurchase in 2006, it managed to buy back 35.7 million of its shares at an average price of $72.78 - $4.56 a share lower than its average trading price for the year - saving investors approximately $163 million. Successful executions of share repurchases such as this are rare and this is a big reason why Berkshire Hathaway has yet to make any.
Barron's wrote a piece in March entitled "With Warren As Your Wingman." It stated that no one who's been investing since 1965 has done better from a performance perspective than Buffett's 22% annualized return. This includes Fidelity's Magellan fund (the highest performing mutual fund), which has gone through several managers over the years (including Peter Lynch!). Buffett did this with no dividends, no share repurchases and one stock split. It makes you wonder why more companies aren't follwoing Berkshire's lead. (To learn more, see Think Like Warren Buffett.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!