“Unrestricted earnings should be retained only where there is a reasonable prospect – backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future – that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors.”
Warren Buffett
Earning Profit is a crucial factor in investment decisions. For Warren also, it is an important decision. Even though he Supports Dividend Payout for Companies, that does not mean he is against the concept of retaining part of the Profit With the company. In fact, in his formula, he mentioned Capitalization expenses. All his followers know Berkshire Hathaway always keeps big Cash on its Balance Sheet. Some people who are curious about it also know the reason for it.
So Warren Buffett is not against Retaining earnings. But he pressure on making out of it. As Berkshire Hathaway is a holding company, Warren Buffett needs to Invest in many other companies. But what about Carmakers? Or companies like Walmart, Coca-cola, P&G, Bank?
Distribution of all the Profit is not a good decision. Warren Buffett mentioned it here. But he also focuses on the increasing market value of the company concerning Retaining Profit.
In India, some companies are not trading as per the Ratio. Like steel Companies, PSU banks. So what is the issue?
The market is very Intelligent. It knows what the issue is with them. For example, in the steel industry, there is a dumping issue with them. Then there is the NPA issue with banks. So the market knows what the actual value of the reserves is.
And so, with this tenet, Warren Buffett indirectly tells us that buy good companies Which don’t have any significant issues.
