Dividends

A Capital Allocation thread Kyle tags through the Berkshire Hathaway Annual Letters. Buffett’s framework: unrestricted earnings “should be retained only when there is a reasonable prospect… that for every dollar retained by the corporation, at least one dollar of market value will be created for owners” — otherwise they should be distributed. He warns to “beware of ‘dividends’ that can be paid out only if someone promises to replace the capital distributed,” and insists that “dividend policy should always be clear, consistent and rational,” quoting Phil Fisher’s hamburgers-vs-Chinese-food analogy: a capricious policy confuses owners and drives away investors. High-return businesses that need little capital should generally “pay out most of [their] earnings in dividends or make significant stock repurchases,” while the worst business to own is one that must “consistently employ ever-greater amounts of capital at very low rates of return.”

Where this appears

• Berkshire Hathaway Annual Letters — dividends as the retain-or-distribute test of capital allocation: keep a dollar only if it creates a dollar of market value, and keep dividend policy clear, consistent, and rational.