It’s the time of year when company results come thick and fast. It’s also the time when legendary US investor Warren Buffett publishes his annual letter to shareholders of his Berkshire Hathaway investment company.
Buffett made some particular points about dividends and share buybacks this year. And both happen to figure prominently in the latest results of many UK companies.
Let’s have a look at what Buffett had to say and run through some of the results.
Dividends
Under a subheading ‘The Secret Sauce’, Buffett highlighted two of Berkshire’s longstanding investments.
He said that in 1994, “Berkshire completed its seven-year purchase of the 400m shares of Coca-Cola we now own. The total cost was $1.3 billion … The cash dividend we received from Coke in 1994 was $75m. By 2022, the dividend had increased to $704m.”
He highlighted much the same story with American Express: “Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3bn. Annual dividends received from this investment have grown from $41m to $302m.”
Working wonders
According to Buffett: “These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At year end, our Coke investment was valued at $25bn while Amex was recorded at $22bn.”
Buffett thinks it highly likely that both companies’ dividends will continue to grow. The corollary is that this will continue to drive gains in their stock prices. The key takeaway he offered investors was: “Over time, it takes just a few winners to work wonders.”
Share buybacks
As well as his view on the value of dividends, Buffett discussed the rationale for share buybacks. He said: “The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices.”
Berkshire bought back 1.2% of the company’s shares in 2022. Meanwhile, buyback programmes at Apple and Amex increased Berkshire’s stake in those businesses at no cost.
Buffett acknowledged that companies can overpay for repurchases, but said: “When you are told that all repurchases are harmful to shareholders … you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
Super-heavyweights
Most FTSE companies this reporting season have rewarded shareholders with increased dividends. A good number have also announced the launch or continuation of share buyback programmes.
Seven of the FTSE 100‘s 10 biggest companies increased their payouts. And share buybacks figured prominently too:
- Shell (+16%) and further buyback programme announced.
- AstraZeneca (+1%).
- HSBC (+28%) and board is considering share buybacks.
- Unilever (unchanged) and ongoing buyback programme.
- BP (+11%) and further buyback programme announced.
- Diageo (+5%) and further buyback programme announced.
- British American Tobacco (+6%) buyback programme completed with further buybacks under consideration.
- Rio Tinto (ordinary dividend -38% and no special dividend) after bumper shareholder returns in 2021.
- Glencore (+69%) and further buyback programme announced.
- GSK dividend rebased following demerger of Haleon.
Eye-catchers
Shareholders of many companies outside the top 10 super-heavyweights have also been treated to higher dividends. Here are just a few that caught my eye:
- Lloyds hiked its payout by 20% and announced a share buyback programme of up to £2bn, “resulting in total capital returns of up to £3.6bn, equivalent to more than 10% of the group’s market capitalisation value.”
- Defence firm BAE Systems lifted its dividend by 8%. The board said it’s “committed to returning value to shareholders through an attractive dividend, which has increased for 19 consecutive years, and share buybacks based on our confidence in the outlook.”
- Distribution specialist Bunzl, a lesser known FTSE 100 stock, increased its dividend by 10% for a “30th consecutive year of annual dividend growth.”
- In the FTSE 250, real estate investment trust Primary Health Properties raised its payout by 5%. The board has already declared a first dividend for 2023 (up 3%), “marking the company’s 27th consecutive year of dividend growth.”
- Renewable infrastructure investor UK Greencoat Wind increased its dividend by 7.5%, and is targeting a 13.5% increase for 2023 in line with December 2022 inflation.
- Investment trust City of London, whose portfolio includes many of the companies I’ve mentioned, is itself a dividend hero. In its interim results, the board expressed confidence in being able to “increase the total annual dividend for the 57th consecutive year.”
Outlook
Despite macroeconomic uncertainties, it seems rising dividends and share buybacks are telling us there’s a good deal of confidence in many UK boardrooms.
