How Warren Buffett Made Berkshire Hathaway a Winner

Berkshire Hathaway (BRK.A, BRK.B) is one of the most coveted stocks and one of the biggest companies in the world. The conglomerate has made a name for itself, thanks to the prowess of Warren Buffett who acquired the company in the mid-1960s.

The billionaire investor has spent his time as the head of Berkshire, turning it into a holding company by buying up troubled businesses and turning them around. With familiar brand names like GEICO, Duracell, and Fruit of the Loom under its belt, the Omaha, Nebraska, company has a market capitalization that exceeds $640 billion, with its Class A stock trading well above $400,000 per share. This article looks at how Buffett turned the company into the success that it is today.

Key Takeaways

  • Warren Buffett purchased Berkshire Hathaway in 1965, turning it into the world's largest holding company by buying troubled businesses and turning them around.
  • Premiums paid to Berkshire Hathaway insurance companies remain on hand or are invested as its managers see fit.
  • Berkshire Hathaway invests in companies that have a long history of paying dividends.
  • Buffett's strategy is to reinvest dividends rather than paying one out to Berkshire Hathaway investors.

Warren Buffett

Alison Czinkota / Investopedia

Berkshire Hathaway: A Brief Overview

Berkshire Hathaway was founded in the 19th century not as one, but as two separate Massachusetts cotton mills—Berkshire Fine Spinning Associates and Hathaway Manufacturing. The two companies merged in 1955 to become Berkshire Hathaway. In 1965, Warren Buffett and his investment firm came in to purchase and take full control of the struggling company. Under his leadership, Berkshire Hathaway became one of the world's biggest holding companies.

Buffett officially made Berkshire Hathaway a conglomerate, purchasing National Indemnity—the first of what would become many insurance acquisitions for the company—while distancing itself from the textile industry by liquidating those assets completely. The company expanded its holdings to include other insurance companies as well as those in the financial, clothing, entertainment, food and beverage, utilities, furniture, household products, media, and materials and construction industries.

Some of the major, well-known subsidiaries under the Berkshire Hathaway banner include:

  • Dairy Queen
  • Fruit of the Loom
  • Benjamin Moore
  • Duracell
  • Pilot Travel Centers

How Warren Buffett Made Berkshire A Winner

Berkshire Hathaway's War Chest

Berkshire Hathaway's lifeblood is what industry insiders call a float. This is any money paid to Berkshire Hathaway’s insurance subsidiaries in premiums but has yet to be used to cover any claims. This money—also referred to as available reserve—doesn't actually belong to the insurance company. Instead, it remains on hand to be invested as its managers see fit. The company's float—$138 billion in 2020—is not only one of the largest in the world, but more than 3,000 times what it was in 1970. It allows Berkshire Hathaway to quickly purchase temporarily wounded companies and breathe life back into them. That's exactly what it did with Fruit of the Loom. Berkshire purchased the struggling clothing company for a mere $835 million in 2002 after its stock lost 97% of its value.

One of the prime tenets held by Buffett’s mentor, Benjamin Graham, is that dividends are an investor’s secret weapon. Many of the Fortune 500 companies in which Berkshire Hathaway holds large positions—Apple (AAPL), Coca-Cola (KO), and American Express (AXP), to name a few—have a steady history of maintaining or increasing dividends every year. Coca-Cola, for example, increased its annual dividend 55 years in a row. While imprudent speculators chase hot stocks whose prices are rising, their patient brethren load up on companies with fundamentals formidable enough to allow regular cash payments to shareholders.

Financial news outlets rarely showcase dividend data the way they do stock price and price movement figures, even though dividends provide one of the surest measures of a company’s potency. After all, management will hand cash over to owners only when operations turn a large enough profit to make said payments feasible. Having said all this, it's Buffet's pursuit of dividends that made Berkshire Hathaway so consistently successful.

Berkshire Hathaway CEO Warren Buffett's unofficial successor will be Greg Abel, CEO of Berkshire Hathaway Energy and Vice Chairman in charge of noninsurance operations, according to an unofficial announcement from Vice Chairman Charlie Munger on May 1, 2021. No date was suggested for the succession.

Pay a Dividend? No Way

If dividends are what attract Buffett to a company, the same rule doesn't necessarily apply to his conglomerate. In fact, the same Buffett who invests in companies that pay dividends avoids paying them out to his own investors. At first, this seems so self-evident that it barely counts as an observation—it makes sense to take the cash that other companies offer you, but never to pay cash out yourself. The only time Berkshire Hathaway actually paid a dividend was once in 1967 to the tune of 10 cents per share. To this day, Buffett claims that he must have been in the bathroom when the dividend was authorized.

That being said, it would be short-sighted for any Berkshire Hathaway shareholder to complain about the company’s refusal to pay dividends. The stock price for Class A shares has skyrocketed since Buffett took the helm, trading at $275 in 1980, $32,500 in 1995, and $424,840 as of the May 5, 2021 market close—a track record without comparison.

Class B shares haven't done badly either: Rising from $20.66 per share when first issued in 1996, to $79 in 2010, to $282 as of May 5, 2021.

Berkshire Hathaway’s rationale is simple and arguing with it can prove to be difficult. Buffett prefers to reinvest the money rather than pay it out. Think about it. If you’re an investor, would you rather have a dividend payment to spend, or would you prefer to see that money put back by the team that turned a humble textile investment into one of the largest, most respected, and most financially robust companies to date?

Since a single share of Berkshire Hathaway Class A stock is equivalent to several years’ worth of the average American salary, it’s no wonder that shares trade infrequently—anywhere from 400 to 3,000 shares change hands a day. Buffett has never entertained the notion of a Class A split, as doing so could encourage speculation.

Buffett did, however, authorize the creation of Class B shares (BRK.B) in 1996, which was valued at 1/30 the value of its Class A counterpart. After a 50-for-1 split of BRK.B in 2010, the Class B stock replaced BNSF on the S&P 500 index. The lower price and concomitant liquidity make Class B stock suitable to be included in 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.

The Bottom Line

Some investors look for value, then purchase shares of companies that fit their criteria. Berkshire Hathaway takes a similar approach. But instead of buying a few shares of a company's stock, it buys the whole company. After decades of applying that investment strategy, the result is a massive global conglomerate.

Article Sources

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