What Is Berkshire Hathaway and Why Is It So Successful?

Berkshire Hathaway is a holding company based in Omaha, Nebraska, that is widely regarded as one of the most sought-after stocks in the world. The company’s success can be attributed to the investment acumen of Warren Buffett, who acquired the company in the mid-1960s and transformed it into a powerhouse by purchasing troubled businesses and turning them around. Today, the company boasts a market capitalization of nearly $800 billion, with Class A stock trading above $550,000 per share.

This article delves into how Buffett turned Berkshire Hathaway into the success story that it is today. As a value investor, Buffett often seeks out companies that are struggling, buys up their stock, and then works to turn them around. Additionally, Berkshire Hathaway prefers to invest in companies that have a long history of paying dividends, which are then reinvested into the company rather than paid out to investors. Finally, the company’s use of the “float” – money taken in as insurance premiums before it is needed to pay claims – has also played a part in its success.

Berkshire Hathaway: An Overview

Berkshire Hathaway has a rich history that dates back to the 19th century when two Massachusetts cotton mills, Berkshire Fine Spinning Associates and Hathaway Manufacturing, merged to form the company. In 1965, Warren Buffett’s investment firm took control of the struggling company and began to acquire insurance companies, starting with National Indemnity.

Buffett later liquidated Berkshire Hathaway’s textile assets to focus on other industries. Today, the company has a diverse portfolio of holdings, including companies in the financial, clothing, entertainment, food and beverage, utilities, furniture, household products, media, and materials and construction industries.

Some of the well-known subsidiaries under the Berkshire Hathaway banner include Benjamin Moore, Dairy Queen, Duracell, Fruit of the Loom, GEICO, Kraft Heinz, and See’s Candies. The company’s success can be attributed to its shrewd investments and strategic acquisitions, which have helped it grow into a global conglomerate.

Berkshire Hathaway’s Side Cash Situation

Berkshire Hathaway’s success is largely due to its ability to generate a significant amount of cash through its insurance subsidiaries. This cash, also known as float, is money paid in premiums that has yet to be used to cover claims. As of 2022, the company’s float was an impressive $164 billion.

This abundance of cash provides Berkshire Hathaway with far more investment flexibility than other companies in the industry. The company’s managers have a diverse stream of non-insurance earnings and a mountain of capital at their disposal. This allows them to quickly purchase companies that may be temporarily wounded and breathe life back into them.

One example of this strategy was the acquisition of Fruit of the Loom in 2002. The struggling clothing company was purchased for $835 million after its stock lost 97% of its value. Berkshire Hathaway was able to turn the company around and make it profitable again.

Berkshire Hathaway’s investment strategy also includes a focus on dividends. Many of the Fortune 500 companies in which Berkshire Hathaway holds large positions, such as Apple, Coca-Cola, and American Express, have a steady history of paying and maintaining or increasing dividends every year. This is in line with the teachings of Buffett’s mentor, Benjamin Graham, who stressed the importance of dividends.

Dividends provide a reliable measure of a company’s vitality, as management will only pay them when operations turn a large enough profit to make such payments feasible. Pursuing dividends along with value investing has been a successful strategy for Berkshire Hathaway.

Looking to the future, Berkshire Hathaway CEO Warren Buffett’s likely successor is expected to be Greg Abel. Abel is currently the CEO of Berkshire Hathaway Energy and vice chair in charge of non-insurance operations. This was unofficially announced by Vice Chair Charlie Munger in May 2021, although no date has been suggested for the succession.

Why Berkshire Hathaway Doesn’t Pay Dividends Itself

Berkshire Hathaway, under the leadership of Warren Buffett, has a long-standing policy of not paying dividends to its shareholders. The company has paid only one dividend in its history, back in 1967, and that was a mere 10 cents per share. Since then, the company has not paid dividends, and it is unlikely to do so in the future.

One of the main reasons why Berkshire Hathaway does not pay dividends is that the company believes in reinvesting its profits back into the business. The company’s management team has a proven track record of generating high returns on invested capital, and they believe that reinvesting profits back into the business is the best way to create long-term value for shareholders.

Another reason why Berkshire Hathaway does not pay dividends is that the company’s stock price has been on a steady upward trajectory for decades. Berkshire Hathaway’s Class A shares have seen a meteoric rise in value since Buffett took over the company, trading at $275 in 1980, $32,500 in 1995, and $551,405 as of the September 8, 2023 market close. Similarly, Class B shares have also seen significant growth, rising from $20.66 per share when first issued in 1996, to $79 in 2010, and $363 as of September 8, 2023.

Given the company’s impressive growth and returns, it is not surprising that shareholders are content with the company’s dividend policy. In fact, many shareholders believe that the company’s refusal to pay dividends is a sign of confidence in its ability to continue generating high returns on invested capital.

It is also worth noting that Berkshire Hathaway’s Class A shares are prohibitively expensive for most investors, with a single share equivalent to several years’ worth of the average American salary. As a result, the shares trade infrequently, with anywhere from 400 to 3,000 shares changing hands daily. Buffett has never entertained the idea of a Class A split, as doing so could encourage speculation.

Instead, Buffett authorized the creation of Class B shares (BRK.B) in 1996, which were valued at 1/30 the price of their Class A counterparts. After a 50-for-1 split of BRK.B in 2010, the Class B stock replaced BNSF on the S&P 500 index. Its lower price and resulting liquidity make Class B stock suitable for an index that attempts to gauge the value of the market. Class A stock is too expensive and too sparsely held to make an effective index component.

In conclusion, Berkshire Hathaway’s policy of not paying dividends is based on the belief that reinvesting profits back into the business is the best way to create long-term value for shareholders. Given the company’s impressive growth and returns, it is not surprising that shareholders are content with the company’s dividend policy.

Related content:

Why Does Berkshire Hathaway Have Both Class A and Class B Shares?

Berkshire Hathaway has both Class A and Class B shares to address the potential threat of unit trusts that would have marketed themselves as Berkshire look-alikes. The company issued Class B shares as a response to this threat, as they would have used the company’s past record to entice naive small investors and charged high fees and commissions. Additionally, the new and less expensive Class B shares provide a low-cost way for people to invest in Berkshire Hathaway. This allows the company to maintain control over who owns its shares while also making investing accessible to a wider range of individuals.

What Is Berkshire Hathaway’s Float?

Berkshire Hathaway’s float is the money the company receives as premiums through its property/casualty insurance business that doesn’t need to be paid out immediately. This money is eventually distributed to pay claims, but until that time, the company can invest it for its own and its shareholders’ benefit.

What Is a Dividend?

A dividend is a distribution of a company’s earnings to its shareholders. It is approved by the board of directors and can be paid in cash, shares, or partial shares. Dividends provide investors with a return on their equity investment without having to sell their shares. They are a way for companies to reward their shareholders and can be a sign of financial stability.

The Bottom Line

Berkshire Hathaway’s investment strategy of buying entire companies has proven successful over decades, resulting in its current status as a global conglomerate. This approach is similar to that of value investors who purchase shares of companies that meet their criteria. By acquiring entire companies, Berkshire Hathaway has been able to have a greater impact on the direction and management of the companies in which it invests.