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 investing prowess of Warren Buffett who acquired the company in the mid-1960s.

The billionaire investor has made Berkshire 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 close to $700 billion and Class A stock trading above $460,000 per share.

This article looks at how Buffett turned the company into the success that it is today.

Berkshire Hathaway: an Overview

Berkshire Hathaway's history begins in the 19th century as two, separate Massachusetts cotton mills called 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 purchased enough shares to 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. He distanced Berkshire from the textile industry by liquidating those assets completely.

The company expanded its holdings to include other insurance companies as well as companies 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:

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

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 that 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. Yet, it remains on hand to be invested as its managers see fit. The company's float was $147 billion in 2021, $9 billion more than in 2020.

Float allows Berkshire Hathaway to purchase temporarily wounded companies quickly 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 paying and 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. So, perhaps it's not surprising that Buffet has pursued dividends along with value investing, and, as a result, has made Berkshire Hathaway so consistently successful.

Pay a Dividend? No Way

Dividends may be what attract Buffett to a company. However, the same man declines to pay 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 that Berkshire Hathaway 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. As of the May 17, 2022 market close, the share price was $471,670. That's quite a track record.

Class B shares haven't done badly either. The price rose from $20.66 per share when first issued in 1996, to $79 in 2010, to $282 as of May 5, 2021. As of the May 17, 2022 market close, the Class B share price was $314.60.

Berkshire Hathaway’s rationale is simple and arguing with it can be difficult. Think about it. As an investor, would you rather receive a dividend payment or see it reinvested 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 daily. Buffett has never entertained the notion of a Class A split, as doing so could encourage speculation.

However, Buffett did authorize the creation of the Class B share (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. Its lower price and concomitant 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.

The Bottom Line

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