Until Warren Buffett announced his deal to buy Burlington Northern late last year, Berkshire Hathaway (NYSE:BRK.A, BRK.B) had never split either its Class A or Class B stock. However, in order to make the deal palatable for Burlington Northern shareholders, he agreed to a 50-to-1 split of Berkshire's B shares, thus allowing smaller investors to receive those instead of the Class A shares that weren't split. Although Buffett's on record as being opposed to both stock splits and the use of stock to acquire companies, he broke these quasi-rules in order to make the deal a win/win for all shareholders. That's his brilliance. He's willing to bend the rules even if it means being contradictory.

IN PICTURES: World's Greatest Investors

Shareholder Rewards
Two more things Buffett frowns upon are dividends and share repurchases. Again, what he says and does are somewhat at odds with each other. In the case of dividends, Buffett believes paying them would do less for investors than capital appreciation of stock; his record speaks for itself. However, Berkshire receives approximately $1.3 billion annually in dividend payments from large investments in companies like Coca-Cola (NYSE:KO), American Express (NYSE:AXP) and Kraft (NYSE:KFT), demonstrating that what's good for the goose isn't necessarily good for the gander. If Buffett truly disagreed with dividends, he'd have no part of these companies and instead would become a growth investor. That's not happening anytime soon.

In 2000, Buffett wrote in his annual shareholder letter that Berkshire Hathaway would buy back its stock when the shares were intrinsically cheap and when it had the cash and borrowing capacity beyond that which was necessary to keep all its businesses operating. While this combination has never come to pass, he did admit in the same letter that there were times in the past where he should have done so. Again, talk is cheap. If he really felt strongly about share repurchases, he would have done something by now. I just don't think he sees the wisdom in playing this game. Having gone and said this, Murphy's Law suggests he'll probably turn around and buy back stock immediately. If he ever does, you can be darn sure the stock price will move higher on the announcement. (Depending on the situation, buybacks can be a good or bad sign for a company. Read 6 Bad Stock Buyback Scenarios for more insight.)

Buffett Might Agree
Offshore oil driller Transocean (NYSE:RIG) announced February 16 that it would pay a special dividend of $1 billion and repurchase up to $3.2 billion of its shares on the open market. Given that its shares are stuck in neutral, it's welcoming news. I'm a big fan of special dividends but generally against share repurchases. In Transocean's case, I'll let this pass because by my calculations, the last time it did a major share repurchase in 2006, it managed to buy back 35.7 million of its shares at an average price of $72.78 - $4.56 a share lower than its average trading price for the year - saving investors approximately $163 million. Successful executions of share repurchases such as this are rare and this is a big reason why Berkshire Hathaway has yet to make any.

Bottom Line
Barron's wrote a piece in March entitled "With Warren As Your Wingman." It stated that no one who's been investing since 1965 has done better from a performance perspective than Buffett's 22% annualized return. This includes Fidelity's Magellan fund (the highest performing mutual fund), which has gone through several managers over the years (including Peter Lynch!). Buffett did this with no dividends, no share repurchases and one stock split. It makes you wonder why more companies aren't follwoing Berkshire's lead. (To learn more, see Think Like Warren Buffett.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    How Warren Buffet Made Berkshire Hathaway A Winner

    Berkshire Fine Spinning Associated and Hathaway Manufacturing Company merged in 1955 to form Berkshire Hathaway.
  2. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  3. Investing News

    What Does the Fire Monkey Mean for Your Portfolio?

    The Chinese new year this year corresponds to the monkey, a quick-witted, playful, tricky figure that means well but has a penchant for causing trouble.
  4. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  5. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Retirement

    Warren Buffett's Investment Lessons for Retirees

    For those in retirement, Warren Buffett's clear, timeless advice on investing is worth a look.
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
RELATED FAQS
  1. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  2. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center