Will Fairfax Financial Holdings Ever Increase its 2.2% Dividend?

It’s as predictable as death, taxes, and the sun rising in the morning.

Fairfax Financial Holdings (TSX:FFH) has paid a $10-U.S.-per-share dividend since 2010, after increasing the payout for four consecutive years starting in 2007. CEO Prem Watsa seems content to leave the dividend alone, telling investors in his 2016 annual letter that management has no additional plans for the annual payout.

Will that change anytime in the future?

In December, Fairfax agreed to acquire Allied World Insurance, a Zurich-based property, casualty, and specialty insurance provider, for $4.9 billion U.S., or $54 per share. The terms of the deal are that Allied World shareholders will receive $10 per share cash and $44 per share of Fairfax shares, although Fairfax does have the option to increase the cash part of the deal to $30 per Allied World share.

Either way, there will be new Fairfax shares hitting the market soon. It doesn’t seem prudent to up the dividend while increasing the share count.

Fairfax only begrudgingly pays dividends. Watsa has intentionally modeled Fairfax to closely resemble Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), which has chosen to reinvest all of its earnings back into the company. It’s obvious Watsa wants as much capital retained as possible.

Fairfax has become a much better insurance underwriter over the years, bringing down its combined ratio to comfortably under 100%. That means the company is profitable on an underwriting basis alone. Allied World should add to those underwriting profits. So, the company will have cash available to pay shareholders.

I wouldn’t expect Fairfax to increase its dividend in the near-term, but I do see it happening at some point in the future. It just isn’t high on management’s priority list right now.