2005: How does Buffett feel about declaring a dividend?

AUDIENCE MEMBER: My name is Pete Banner (PH) from Boulder, Colorado.

First of all, Mr. Buffett, Mr. Munger, we shareholders consider you our heroes. We appreciate and very much value who you are and what you do in the world. So, thank you.

WARREN BUFFETT: Well, thank you, Pete.

And I will say in return that we think we’ve got the best group of shareholders in the world. And to some extent, it’s evidenced by the fact we have the lowest turnover, and, I think, the most knowledgeable group, incidentally, too, of shareholders.

So, with that our mutual love affair can go on. (Laughter)

AUDIENCE MEMBER: Thank you very much.

Secondly, with taxes as they are today, 15 percent on dividends, how do you feel about declaring a dividend?

WARREN BUFFETT: Oh, you were setting me up. (Laughter)

No, there’s no question about the fact that dividends are lightly treated now for taxation purposes.

But we have always said, and it’s been true, that if there were no tax on dividends, to this point at least, we would have followed an identical dividend policy, because the test with us is whether we think we can retain a dollar, and in turn — and have it worth, in present value terms, more than a dollar.

If we can’t do that, we should distribute any money that we can’t — we can’t utilize on that basis.

Now, when the cash piles up, like currently — it has currently — you can say it’s pretty dumb to hold, you know, billions of dollars at — last year the rates were less than 1 percent after-tax — and, you know, what are you doing for shareholders with that?

And I would say that the burden of proof will certainly shift if, within a few years, we can’t use a lot more money intelligently than we are now.

But, if we were — at the time at which we feel that the present value of the earnings we retain is not greater than a dollar comes, and it could come, and it’s more likely to come when you get large like we are, then we should have a — not only a, you know, dividend policy that’s X percent of earnings, we should pay out very substantial sums.

The test is whether the money can be used effectively within the business. So far, it has been.

That doesn’t mean it was yesterday or the day before, but so far, it’s produced more than a dollar’s worth of market value for every dollar retained.

But that will be discussed — our directors meet Monday — that will be discussed then, and you are certainly — if we sit here a couple of years from now and we have not successfully deployed more cash, then I think that the burden of proof has shifted dramatically to us to explain why we would be retaining earnings at that point.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add to that, too.