The value of a company, in theory, is the sum of the income it can be expected to deliver to shareholders in the future. Except for one thing: some of the most valuable and successful companies don’t really deliver much income at all.
Apple Inc. and Berkshire Hathaway Inc. are the two most prominent cases in point. Apple’s shareholder meeting Wednesday ended with no commitment to give some of the company’s $137 billion cash pile back to investors. Meanwhile, as Bloomberg’s Noah Buhayar reported yesterday, Warren Buffett, nearing retirement, now confronts speculation about how much longer Berkshire will continue its no-dividend policy. Google’s $49.6 billion cash holdings, it’s worth noting, are also nothing to sneeze at.
Investors can get back cash through dividends or share buybacks. Apple, which stopped paying a dividend in 1995, brought it back last year. Both Apple and Berkshire bought back shares last year last year, but they are still building up cash a lot faster than they are handing it back to investors.
The resistance to buybacks and dividends makes sense. Buhar notes that Buffett back in 1985 wrote that dividends only make sense when management can’t generate adequate returns by keeping money in the business. That sounds reasonable: why take back money from a manager who will make it multiply faster?
If only managers weren’t somewhat biased on this front. Many believe that they are the best stewards of investors’ money. Not all of them are. Over the long run, even insanely great companies slow down — and the long term aging process isn’t always pretty. Investors trusted Buffett to make better use of their money than anyone else. It’s not clear that they will have the same a priori faith in his successors. Giving back money to shareholders could be the sign of a manager who does not believe in his own abilities — or of one who is wary of believing in them too fervidly.