Warren Buffett once told us that avoiding dividends during the early years of Berkshire Hathaway gave him the ability to refocus the companys money on better businesses, just like a person would overcome a misspent youth.

The billionaire Warren Buffett, now 82 years old, is focusing on his legacy as he prepares Berkshire Hathaway for new management as his time with the company winds down to a close. Using the annual letter being published on March 1 as a way to outline a dividend plan could show shareholders a way for the next leaders of the company to look at the challenge of allocating profits.

It may ease the burden on the successors if they have the ability to pay a dividend, Richard Cook tells us, co manager of the Cook & Bynum Fund, which has Berkshire Hathaway as one of its largest holdings. Berkshire and its subsidiaries generate a lot of cash.

Buffetts annual letter is there to teach Berkshire Hathaway shareholders about corporate governance, investing and business, as well as the annual meetings in Omaha, Nebraska, where the company is located. As Berkshire grew through acquisitions and investment gains, so did its rather large pile of cash, which by the end of September 2012 amounted $47.8 billion. This large sum has made it very difficult to allocate the funds, since it is often difficult to find large investments that are worthwhile, we learned from Buffett himself.

The CEO and Chairman started buying back Berkshire shares in 2011 and used part of the most recent annual letter to explain when share repurchasing made sense. Last May, while on CNBC, he said that he would probably discuss the makings of a logical dividend policy in the upcoming annual letter.

Buffetts Blessing

It’s a very sensible move to discuss when the company should begin paying a dividend, so the next CEO of Berkshire Hathaway will appear to have a Buffetts blessing, we learned from Tom Russo, currently a partner at Gardner Russo & Gardener, overseer of more than US$5 billion, and that includes Berkshire Hathaway shares. After Warren Buffett is gone, many will have a tendency to second-guess, said Russo.

In 1965, Warren Buffett took over Berkshire Hathaway and changed it from a company that made mens suit linings and textiles, and turned it into a $251 billion company that currently has retail businesses, lots of manufacturing companies, subsidiaries that generate electricity, they sell insurance and haul freight among many other things. His opinions about investments, due to his excellent record of accomplishment, make his annual letters a must read on Wall Street.

In his 1985 letter, Warren Buffett said that dividends make sense when a companys managers cannot generate adequate returns when keeping the money inside the business. Berkshire Hathaway never paid a dividend because its always been able to earn better rates on retained profits, he told us at the time.

Averting Disaster

Buffett once wrote that paying a significant amount of money to his investors could have actually been disastrous in the beginning because the three businesses that he and Charlie Munger oversaw in the beginning had very little money. They also incurred losses and were only a fraction of their original size just 20 years later.

Its been like overcoming a misspent youth, said Buffett of the Berkshire Hathaway effort to expand their chocolate making, newspaper publishing and insurance businesses. Clearly, diversification has served us well.

Buffett continually finds the best ways to invest the extra cash that Berkshire Hathaway has on hand. Over the last 30 years, hes amassed tremendous stakes in large companies including IBM, Coca-Cola and Wells Fargo & Co. He even buys whole companies such as General Re reinsurer and Burlington Northern Santa Fe railroad.

Just this month, he teamed up with Jorge Paulo Lehmans 3G Capital in a deal worth $23 billion to purchase H.J. Heinz Co. and make it a private company. The deal will provide Berkshire Hathaway with $4.1 billion worth of equity and $8 billion in preferred stock that pays a dividend of 9%, we learned from the regulatory filing.

Charles Munger’s Wish

Warren Buffett points out his own mistakes in his annual letters, and he also uses them to praise his managers like Ajit Jain, his reinsurance chief, and the CEO of Burlington Northern Santa Fe Matt Rose. Warren Buffett relies heavily upon the subsidiary heads to oversee the day-to-day operations of these businesses. This leaves him and Charlie Munger the time they need to allocate the profits properly.

I believe that some of the people reading this article will live to see the day when Berkshire Hathaway pays a dividend. But hopefully it isnt in the very near future.

The enormous size of Berkshire Hathaway could very well make a dividend a necessity at some point in the future since they may not have a better way to invest the accumulated funds, we heard from Munger at a meeting during 2011 in Pasadena, California.

I think that some of you will live to see Berkshire pay a dividend, but I hope I dont, said Munger, 87 years old at the time, responding to the question of a member of the audience. Youre saying, ‘Do you predict failure?’ And I suppose I do.

During last years annual letter, Warren Buffett told us that the board chose a manager to take over as the next CEO, but they chose not to identify this individual. For a while now, Mr. Buffett has been allowing his investment managers Ted Weschler and Todd Combs to oversee more of the company’s $88 billion worth of stock.

Stock Rally

As of this morning, Berkshire Class A shares gained 0.5% to reach the amount of $152,650 at the opening around 9:35 AM in New York. Over the last 12 months, Berkshire has rallied for a 29% gain due to the gains in their operating units, a buy back in stock and Bank of America Corp. investment. In the same period of time, the S&P 500 index only gained 10%.

One roadblock to potentially paying a dividend now is that Warren Buffett, as the largest shareholder of Berkshire Hathaway, would have to do something with the payments he earns, said Russo. You probably know that he has pledged the majority of his wealth to charity, but he still has stock in Berkshire Hathaway worth more than $50 billion.

Warren doesnt want cash. He doesnt need it. He doesnt want the burden of investing it, said Russo.

Paying a dividend could certainly makes sense once Buffett is no longer leading the firm, and more of the current shares he has passed over to the Bill & Melinda Gates Foundation as well as his childrens philanthropic endeavors, Russo said. These charitable organizations are obligated to spend the money generated by a dividend, Russo also said.

The mutual fund manager, Cook, said hed rather Berkshire skip paying a dividend and hold onto the cash for the time being.

Youve got a 50 year track record of being the best capital allocator in the world, said Cook of Buffett. As long as hes alive, we think were generally better off with him handling the money.

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