How Warren Buffett Made Berkshire Hathaway a Winner

Berkshire Hathaway (BRK.A, BRK.B) is one of the most coveted stocks in the world. The Omaha, Nebraska-based holding company has made a name for itself thanks to the investing prowess of Warren Buffett, who acquired it in the mid-1960s.

The billionaire investor built Berkshire into a powerhouse 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 company today has a market capitalization of close to $800 billion and Class A stock trading above $550,000 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 pre-Buffett history begins in the 19th century with two separate Massachusetts cotton mills called Berkshire Fine Spinning Associates and Hathaway Manufacturing. The companies merged in 1955 to become Berkshire Hathaway.

In 1965, Warren Buffett and his investment firm bought enough shares to take full control of the struggling company. They then purchased National Indemnity, in the first of what would become many insurance company acquisitions. Buffett distanced Berkshire from the textile industry by liquidating those assets completely.

The company expanded its holdings to include 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:

• Benjamin Moore
• Dairy Queen
• Duracell
• Fruit of the Loom
• GEICO
• Kraft Heinz
• See's Candies

Berkshire Hathaway's War Chest

Berkshire Hathaway's lifeblood is what industry insiders call a float. This is the money paid to Berkshire Hathaway's insurance subsidiaries in premiums that has yet to be used to cover claims.

This money—also referred to as available reserve—is available for investment as company managers see fit. The company's float was $164 billion in 2022.

As the company put it in its 2022 annual report, "our unrivaled mountain of capital, abundance of cash and a huge and diverse stream of non-insurance earnings allow us far more investment flexibility than is generally available to other companies in the industry. The many choices open to us are always advantageous—and sometimes have presented us with major opportunities."

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 $835 million in 2002 after its stock lost 97% of its value.

One of the prime tenets of Buffett's mentor, Benjamin Graham, was the importance of dividends. 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, has increased its annual dividend every year since at least 1980.

While financial news outlets rarely showcase dividend data the way they do stock price and price movement figures, dividends provide one of the surest measures of a company's vitality. After all, management will hand cash over to shareholders only when operations turn a large enough profit to make said payments feasible. So, perhaps it's not surprising that Buffett has pursued dividends along with value investing.

Why Berkshire Hathaway Doesn't Pay Dividends Itself

Dividends may be what attract Buffett to a company. However, the same man declines to pay them out to his own investors.

The only time that Berkshire Hathaway has paid a dividend was in 1967, to the tune of 10 cents per share. Buffett later joked 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 $551,405 as of the September 8, 2023 market close. That's quite a track record.

Class B shares haven't done badly either. Their price rose from $20.66 per share when first issued in 1996, to $79 in 2010, and $363 as of September 8, 2023.

Berkshire Hathaway’s rationale is simple and arguing with it can be difficult: 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. Typically, 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 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.

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. By applying that investment strategy for decades, Berkshire Hathaway became the massive global conglomerate that we know today.