2012: Would a higher stock price help Berkshire use stock to acquire BNSF?

AUDIENCE MEMBER: Yes. John Horton, Water Street Capital, Jacksonville, Florida.

Since Berkshire will likely need to offer a stock component for very large acquisitions like Burlington Northern, wouldn’t Berkshire lower its cash outlay by increasing the price of its stock to near fair value, perhaps by offering a 2 to 3 percent dividend or a promised percentage of cash earnings?

Might this have the effect of actually lowering the cash outlay needed for such acquisitions? As 30-year shareholders with almost $1 billion of exposure, we like this approach. Thank you.

WARREN BUFFETT: Yeah. We would obviously prefer to have our stock sell at exactly intrinsic business value, even though we don’t know that precise figure, but Charlie and I would have a range that would not differ too widely.

And if it’s over intrinsic business value, and we could use it as part of a consideration for buying something else at intrinsic business value, and then use cash for the balance, you know, we would like that situation.

And that — that’s very likely to occur in the future. It’s occurred in the past. Berkshire, without paying a dividend, has sold, probably, at or above intrinsic value as much of the time in the last 35 or so years as it has below.

I mean, it will bob around. And I do not think a dividend would be a plus, in terms of having it sell at intrinsic value most of the time. I think it might be just the opposite.

I mean, here we are, we’re willing to pay, you know, 110 cents on the dollar for what’s in there.

So the idea of paying out money, which we think is worth at least 110 cents on the dollar within the place, and have it turn into 100 cents on the dollar when paid out, just is not very attractive to us, unless we find we can’t do things in the future that make sense.

But our goal — and we put it in the annual report. Our goal is to have the stock sell at as close to intrinsic business value as it can.

But with markets — you know, the way markets operate, most of the time it will be bobbing up or down from that level. And we’ve seen that now for 40-plus years, and we’ve tried to, at least in a way, point out what we think is going on.

And if it ever — if it — and it will. I mean, when it trades at intrinsic business value or higher, there may be times when we will use it.

We’d still prefer using cash, though. Cash is our favorite medium of purchase just because we’re going to generate a lot of it. And we hate giving out shares.

We do not like the idea of trading away part of See’s Candies or GEICO or ISCAR or BNSF. The idea of leaving you with a lower percentage interest in those companies because of any acquisition ambitions of ours is anathema to us.

Charlie?

CHARLIE MUNGER: Well, what he suggested is a very conventional approach, and we think it’s better for the shareholders to do it the way we’re doing it. (Applause)

WARREN BUFFETT: I should point out, I’m in the position — giving away all of my stock between now and 10 years after my death when my estate is settled — but I’m giving it away every year.

You know, it will do more good, in terms of its philanthropic consequences, if it’s at a higher price than lower price. I mean, there’s nobody here that has more of an interest in the stock selling at what I’ll call a fair value, as opposed to a discount value, than I do.

I know I’m not a seller, but I’m disposing of the stock, and I would rather have it buy, you know, X quantity of vaccines than 80 percent of X.

So it isn’t like we’ve got some great desire to have the stock sell cheap. If it does sell cheap, we’ll, you know, we’ll buy it in, but our interest is really in having it sell at, more or less, the fair value.

And we think if we perform reasonably well, in terms of running the business, and if we tell the truth about the business, and explain to a selected group of shareholders who are interested in that aspect of investing, that over time, it will average that.

And that’s happened over the years, but it doesn’t happen every year. If people get excited enough about internet stocks, they’re going to forget about Berkshire. When they get disillusioned with internet stocks then — I’m going back 10 or 12 years on that.

But there have been times when people have gotten very excited about Berkshire, and there have been times when they’ve gotten very depressed.