Originally Posted Online: March 02, 2013, 6:46 pm
Last Updated: March 02, 2013, 11:25 pm

Buffett says $24 billion gain wasn't good enough

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SAN FRANCISCO — In his highly anticipated annual shareholder letter Friday, famed investor Warren Buffett of Berkshire Hathaway Inc. went straight to the bad news.

Despite Berkshire achieving a $24.1 billion net gain for shareholders and the conglomerate's book-value rising 14.4 percent in 2012, he deemed it a "subpar" performance.

"For the ninth time in 48 years, Berkshire's percentage increase in book value was less than the S&P's percentage gain (a calculation that includes dividends as well as price appreciation)," wrote Buffett, who for decades has measured Berkshire's overall performance in terms of book value.

The Standard & Poor's 500-stock index rose 16 percent last year, including dividends.

Buffett went on to say another disappointment was his inability to complete a major acquisition, something that's eluded him in recent years. "I pursued a couple of elephants, but came up empty-handed," he wrote.

Buffett said Todd Combs and Ted Weschler, who Buffett brought on board in the past two years to handle more of Berkshire's stock picks, each outperformed the S&P 500 by double-digit margins last year.

DirectTV is one stock they both own in their respective portfolios.

"They left me in the dust as well," Buffett wrote. "Todd and Ted are young and will be around to manage Berkshire's massive portfolio long after (Berkshire Vice-Chairman) Charlie (Munger) and I have left the scene. You can rest easy when they take over."

Their reward for last year's performance: The size of the funds they manage were bumped up to almost $5 billion.

Buffett's annual letter has long been a must read for professional and amateur investors alike because of its frank discourse on investing and business.

In his letter, Buffett addressed the rationale for Berkshire not paying a dividend even though the company is sitting on a $46.9 billion stockpile of cash. Observers have wondered if a dividend is in the works since Buffett has not been able to unload that cash in a huge acquisition.

Buffett noted in the letter than Berkshire changed its share buyback criteria in December, increasing the maximum it will pay to 120 percent of book value. The company previously had offered to repurchase shares at up to 110 percent of book value. "That proved unrealistic," Buffett said.

As for dividends, Buffett likes them — for other companies, that is — including businesses that Berkshire is invested in. For instance, Berkshire reaped $1.1 billion in dividends last year from the firm's four biggest stock investments — American Express Co., Coca-Cola Co., IBM and Wells Fargo & Co.

Buffett told Berkshire shareholders that paying them a dividend from the company's large cash stockpile would be detrimental to the value of their shares over the long term.

"Dividends impose a specific cash-out policy upon all shareholders," he said. Many shareholders, he added, would prefer to sell a portion of their stock and create their own income stream, or have a lengthy time horizon and therefore "should prefer no payment at all."

Dividends also are tax inefficient, Buffett said. All of the cash from dividends is taxed every year, he pointed out, whereas shareholders are taxed only when they sell.

And Buffett made it clear that Berkshire shareholders should not expect his opinion on Berkshire dividends to change.

"We will stick with this policy" as long as assumptions that the company can grow its book value and command a premium share price "seem reasonable," Buffett wrote.

"If the prospects for either factor change materially for the worse," he added, "we will re-examine our actions."

Buffett has started 2013 off on a promising note. Berkshire teamed up with Brazil's 3G Capital to buy ketchup maker H.J. Heinz for $23 billion.

"So it's back to work." Buffett said. "Charlie and I have again donned our safari outfits and resumed our search for elephants."