Berkshire Hathaway The goal of this document is to help students to do an individual case eval- uation of the Ivey case: Berkshire Hathaway: Dividend Policy Paradigm. This document was made necessary by the Covid-19 closure of the UiS cam- pus. It is not a case solution, but contains more detailed pointers to questions students should think about when going through the case. Characterizing Berkshire's current dividend policy What are generic dividend policies? Constant dividend constant ratio of earnings constant amount per share Stable dividends constant minimum per year extra dividend when earnings are high Residual dividends. - Only pay when investment needs have been fulfilled What are typical determinants of dividend choices? Life-cycle - how old is the company, at what stage in its life-cycle does dividends make most sense? What type of company is this? Investment needs. What is the recent history in terms of investments for this company? This is the company of Warren Buffet. What does that mean? Are there any implications for investment policy? Is this a company which potentially need a large pile of cash? What is the company cash flow in recent years? Tax and other imperfections. Accounting rules. Capital structure dividends can only be paid once other obligations (e.g. debt interest) have been fulfilled. Cash holdings. Repurchases as alternative to dividends. The cases provides an excerpt from Buffets writings. Use that to provide some numerical guidance. What are the assumptions Buffet is using when constructing his example? To what extent are these reasonable? In general, what do we know about repurchases vs dividends? Under ideal conditions, they are equivalent. Empirically, we generally see repurchases replacing dividends, particu- larly in the US. There are capital market imperfections leading to prefer one over the other, for example tax considerations. Homemade dividends An argument often made for a company to pay dividend is that an individual equity owner needs the cash dividend payment for consumption purposes. (See "Spleiselaget"). The term homemade dividends points to the obvious counterargument: If you own hundred shares, you can achieve the equivalent of a dividend yield of 1% by selling one of those hundred shares. The individ- ual equity owner can achieve whatever desired dividend yield through buying and selling shares, instead of receiving a dividend check from the company. Are there special issues with Berkshire Hathaway which makes this harder? Equity Classes Berkshire Hathaway has equities of different classes, A and B shares. The typical reason for having stocks of different classes is voting rights differen- tiation, Class A shares with more voting rights than Class B shares. (BTW, Sweden is the country in the world with the largest fraction of the stock exchange in companies with A and B shares.) Is this the case with Berkshire Hathaway? Very High Stock Prices A potential stumbling block for homemade div- idends (and for individual shareholding in general) is if a single stock has a large stock price, which is the case here for the A shares. The usual counter to this is to split stocks.