Essays on the advantage of paying dividends

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Classes of shares

Are these essay examples edited? It puzzles them that we relish the dividends we receive from most of the stocks that Berkshire owns, but pay out nothing ourselves. A profitable company can allocate its earnings in various ways which are not mutually exclusive. I ask the managers of our subsidiaries to unendingly focus on moat-widening opportunities, and they find many that make economic sense.

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But sometimes our managers misfire. The usual cause of failure is that they start with the answer they want and then work backwards to find a supporting rationale. Your chairman has not been free of this sin. I wanted the business to succeed and wished my way into a series of bad decisions. I even bought another New England textile company. Despite such past miscues, our first priority with available funds will always be to examine whether they can be intelligently deployed in our various businesses.

The Advantages of Paying Dividends | Pocketsense

And here we have an advantage: Because we operate in so many areas of the economy, we enjoy a range of choices far wider than that open to most corporations. In deciding what to do, we can water the flowers and skip over the weeds. Even after we deploy hefty amounts of capital in our current operations, Berkshire will regularly generate a lot of additional cash.

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Our next step, therefore, is to search for acquisitions unrelated to our current businesses. Here our test is simple: Do Charlie and I think we can effect a transaction that is likely to leave our shareholders wealthier on a per-share basis than they were prior to the acquisition? I have made plenty of mistakes in acquisitions and will make more. Overall, however, our record is satisfactory, which means that our shareholders are far wealthier today than they would be if the funds we used for acquisitions had instead been devoted to share repurchases or dividends.

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But, to use the standard disclaimer, past performance is no guarantee of future results. Nevertheless, a large deal still offers us possibilities to add materially to per-share intrinsic value.

go here BNSF is a case in point: It is now worth considerably more than our carrying value. Had we instead allocated the funds required for this purchase to dividends or repurchases, you and I would have been worse off. Though large transactions of the BNSF kind will be rare, there are still some whales in the ocean. The third use of funds — repurchases — is sensible for a company when its shares sell at a meaningful discount to conservatively calculated intrinsic value.

But never forget: In repurchase decisions, price is all-important. Value is destroyed when purchases are made above intrinsic value. And that brings us to dividends. Here we have to make a few assumptions and use some math. The numbers will require careful reading, but they are essential to understanding the case for and against dividends. So bear with me.

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That plan, you feel, will nicely balance your needs for both current income and capital growth. There is an alternative approach, however, that would leave us even happier. Under this scenario, we would leave all earnings in the company and each sell 3. Because we would be selling shares each year, our percentage ownership would have declined, and, after ten years, we would each own Both assumptions also seem reasonable for Berkshire, though certainly not assured.

Moreover, on the plus side, there also is a possibility that the assumptions will be exceeded.

Objectives of Dividend Policy:

If they are, the argument for the sell-off policy becomes even stronger. Aside from the favorable math, there are two further — and important — arguments for a sell-off policy.

Ust Case Solution

First, dividends impose a specific cash-out policy upon all shareholders.