In its report for the third quarter of 2019, Berkshire Hathaway (BRK-A, BRK-B) reported better-than-expected earnings and an all-time record cash pile of $128 billion.
Once again, the question will be asked: Why doesn't Berkshire-Hathaway pay a dividend to its shareholders?
The short answer is that company founder and CEO Warren Buffett believes that money can be better spent in other ways.
- Berkshire Hathaway is an important diversified holding company led by renowned investor Warren Buffet that invests in the insurance, private equity, real estate, food, apparel, and utilities sectors.
- Despite being a large, mature, and stable company, Berkshire does not pay dividends to its investors.
- Instead, the company chooses to reinvest retained earnings into new projects, investments, and acquisitions.
Reinvesting Is Top Priority
In particular, Buffett prefers to reinvest profits in the companies he controls in order to improve their efficiency, expand their reach, create new products and services, and improve existing ones.
The annualized average 5-year returns of BRK-A and BRK-B as of January 2021.
Like many business leaders, Buffett feels that investing back into the business provides more long-term value to shareholders than paying them directly, because the company's financial success rewards shareholders with higher stock values.
Despite the company having a record amount of cash on hand, the prospect of a Berkshire Hathaway dividend is dim as long as Buffett is in charge. The company has paid only one dividend, in 1967, and Buffett later joked that he must have been in the bathroom when the decision was made.
In fact, he has said that he has three priorities for using cash that are ahead of any dividend: Reinvesting in the businesses, making new acquisitions, and buying back stock when he feels that it is selling at "a meaningful discount to conservatively estimated intrinsic value." (It purchased $700 million of its own stock in the third quarter of 2019.)
Nevertheless, statistics give credence to Buffett's stance that using profits to buttress the company's financial position results in greater wealth for shareholders than paying dividends. Berkshire Hathaway's BRK-A increased by over 700,000% between 1964 and 2014. As of late 2018, BRK-A and BRK-B both reported annualized ten-year returns of 10.94%.
In 2019, the stock has lagged behind the S&P 500 Index. As of the end of the third quarter of 2019, it's Class A stock was up 5.7% for the year at $323,400 per share.
Prospects for Acquisitions
It's tough to argue with success like that, but some shareholders do. It has been argued that a small portion of the enormous amount of cash on hand could well be devoted to making shareholders even happier.
There is speculation, of course, that Buffett is preparing for a major acquisition. The company hadn't made one in nearly four years, as of late 2019.
There isn't much you can't buy for $128 billion, and in fact, no corporate acquisition has come close to that figure since the doomed merger of AOL and Time Warner in 2000.
The Bottom Line
In one of his famous letters to shareholders, Buffett said that perhaps Berkshire-Hathaway might institute a dividend 10 or 20 years down the road. This was in 2018 when Buffett was 88. Unless he really is immortal, that suggests that his answer to dividends for Berkshire shareholders remains a firm "no."