The Morning Ledger: That Time Buffett Made a Bet Too Good

The Morning Ledger: That Time Buffett Made a Bet Too Good

By Maxwell Murphy

Berkshire Hathaway Chairman and CEO Warren Buffett. John Peterson/Associated Press

Good morning. Warren Buffett backed Dow Chemical Co. seven years ago, but the smart deal he struck may be in jeopardy because Dow Chemical stock is, quite frankly, doing too well. Berkshire Hathaway Inc. continues to reap rich dividends from a canny loan extended to Dow to finance a purchase amid the financial crisis. But a recent rally is putting that income stream at risk. Shares of Dow have spent much of the past month hovering above $53—perilously close to a level that would cause Berkshire to lose a $255 million-a-year dividend. Since 2009, when Berkshire lent Dow Chemical $3 billion to help finance its purchase of Rohm & Haas, Dow has been on the hook for paying an 8.5% annual dividend on three million shares of preferred stock.

Those shares have resulted in more than $1.5 billion for Berkshire. As Mr. Buffett likes to say, that amounts to $8 a second. But the agreement has an escape hatch: If Dow's shares exceed $53.72 for at least 20 trading days in a 30-day period, the chemical company can convert Berkshire's preferred shares into common stock, which pays a 3.4% annual regular dividend. Dow executives haven't made a secret of their desire to execute that conversion and to shut off the dividend spigot—and Mr. Buffett, conversely, wants to avoid the evaporation of those dividends. Dow believes someone is betting against the stock to keep it from rising, according to people familiar with the matter. The 2009 preferred-stock agreement had barred Berkshire from shorting Dow shares until April 2014.

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THE DAY AHEAD

Central bankers need to prove mettle. When central bankers gather this week in Jackson Hole, Wyo., they will be consumed not with some pressing crisis in the global economy but by an existential threat to their relevance. The threat stems from the realization that the sluggish economic growth that has prevailed since 2009 may be here to stay. If so, then so are today's low interest rates. Central banks set interest rates to balance investment and savings and thus keep economies fully employed and inflation stable. The interest rate that achieves that balance is called the natural rate.

CORPORATE NEWS

Mylan's EpiPen. Getty Images

Mylan gets EpiPen backlash. Mylan NV became the latest pharmaceutical company to face popular outrage about higher drug costs, as attacks mounted Wednesday on the company's substantial price increases for the EpiPen emergency allergy treatment. EpiPen is a lifesaving treatment for millions whose allergies can send them into severe shock, including many schoolchildren who are advised to keep an injector handy at all times. A pack of two lists for $608.61, up 548% since Mylan began selling the drug in late 2007. Its 17 price increases during that span, including two since a major competitor was recalled late last year, has emerged as the newest flashpoint in public scrutiny of drug costs.

Dividends, like cash, are king. Dividends are playing an unusually large role in the stock market's run to record highs, adding to investors' concerns about stretched valuations and soft corporate earnings. The five-year rolling correlation between S&P 500 companies' dividend yield and the index's performance has been at 0.80 or above for the five quarters through June, according to S&P Global Market Intelligence. That is the highest since 1993 and up from an average of minus-0.1 dating back to 1941.

Fistful of dollars. A dollar goes a long way these days, Steven Russolillo writes for Ahead of the Tape. Dollar General Corp. and Dollar Tree Inc. have been big winners in the stock market, up more than 20% over the past year on strong sales growth and higher store traffic. Rising wages among their core clientele suggest the good times may continue as both companies gear up to release second-quarter earnings reports, expected Thursday.

Sleep like an Egyptian? Wal-Mart Stores Inc., Target Corp. and other big U.S. retailers have become entangled in a controversy over whether one of India's biggest textile companies has been supplying their stores with phony "Egyptian cotton" sheets. Last Friday, Target said it was pulling thousands of items off its shelves and cutting ties with Welspun India Ltd. after an investigation determined Welspun had used non-Egyptian cotton for about two years. Wal-Mart, J.C. Penney Co. and Bed Bath & Beyond Inc., three other big Welspun customers, said this week they were opening investigations into whether the company supplied them with authentic Egyptian-cotton products.

Oil glut meets debt glut. Some of the world's largest energy companies are saddled with their highest debt levels ever as they struggle with low crude prices, raising worries about their ability to pay dividends and find new barrels. Exxon Mobil Corp., Royal Dutch Shell PLC, BP PLC and Chevron Corp. hold a combined net debt of $184 billion, or more than double their debt levels in 2014 when oil prices began a steep descent that eventually bottomed earlier this year. Crude prices have rebounded since, but still hover near $50 a barrel, less than double the nadir.

Big banks push ahead with blockchain technology. UBS Group AG, Banco Santander SA, Deutsche Bank AG and Bank of New York Mellon Corp. are working with U.K. broker ICAP to develop a so-called utility settlement coin that would convert into existing currencies deposited at central banks. The effort is one of several pursued by large banks as they search for ways to take advantage of cryptography to save costs, the Financial Times reports.

U.S. and German audit regulators sign cooperation pact. The Public Company Accounting Oversight Board and the German Auditor Oversight Body agreed to cooperate in oversight of audit firms subject to both regulatory jurisdictions, the Journal of Accountancy reports. The deal provides a framework for joint inspections and allows the regulators to exchange confidential information in accordance with German laws and the Dodd-Frank Act.

Apple CEO tastes the fruit. Tim Cook, who marked his five-year anniversary as Apple Inc.'s chief executive officer on Wednesday, received shares valued at $373 million during that period as the iPhone maker's stock doubled on his watch. When Mr. Cook took the helm in 2011, he was granted one million shares, Bloomberg reports. Originally, 50% of those were scheduled to vest on his five-year anniversary, with the rest coming due after a decade with the company. That changed in 2013, when Cook voluntarily tied one-third of the award to outperforming the S&P 500 Index and the shares began vesting annually.

REGULATION

Treasury bites back at EC probes. The U.S. Treasury Department released a sharp critique of the European Commission's investigation of corporate tax breaks as EU officials near the end of their inquiry into Apple's arrangements with Ireland. In a 25-page paper released Wednesday, the Treasury elaborated on arguments it has been making all year. The U.S. contends that the EU has made an "unforeseeable departure from the status quo" and is acting inconsistent with international tax norms.

EARNINGS

HP's logo on display. Associated Press

HP results lackluster, but stabilizing. HP Inc.'s revenue and earnings shrank in its most recent quarter, but the company showed signs of stabilizing its declining personal-computer business, its largest revenue generator. The Palo Alto, Calif.-based company said its personal-systems revenue was flat in the latest quarter after five quarters of declines. Revenue fell 14% in its printing business, which generates most of HP's profits, reflecting greater use of email and file sharing rather than printing documents.

ECONOMY

Nice while it lasted. Sales of previously owned homes slipped in July, a sign that higher prices are taking a bite out of U.S. housing demand. The pace of existing-home sales decreased 3.2% last month from June to a seasonally adjusted annual rate of 5.39 million, the National Association of Realtors said Wednesday. The decrease was the first since February. Economists surveyed by The Wall Street Journal had expected a July sales pace of 5.52 million. Still, the pace remains near postrecession highs.

CFO MOVES

Acadia Pharmaceuticals Inc., a San Diego drug-development company, named Todd Youngfinance chief. Chief Executive Officer Stephen Davis is no longer be principal accounting officer. Mr. Young joins Acadia from Baxalta Inc., where he was treasurer, and helped the former Baxter International Inc. subsidiary form its capital structure before it was spun out to the public last year. He will receive a salary of $405,000, with a bonus targeted at 45% of that amount. He will also receive an option to buy up to 200,000 shares.

Liberty Global PLC, a Denver global television provider, said co-CFO Charlie Bracken will assume the CFO role when Bernie Devorak retires as co-CFO at the end of the year. Mr. Bracken joined the company's predecessor operations in Europe in 1999. Compensation details weren't immediately disclosed. Liberty Global also named Jason Waldron, currently a KPMG LLP partner, as accounting chief, effective in October.

The Morning Ledger from CFO Journal cues up the most important news in corporate finance every weekday morning. Send us tips, suggestions and complaints: maxwell.murphy@wsj.com. Get the free Morning Ledger emailed to you each weekday morning by clicking here, or at: http://on.wsj.com/TheMorningLedgerSignup