- Berkshire Hathaway is a large diversified holding firm that invests in the insurance, private equity, real estate, food, apparel, and utilities industries and is run by famed investor Warren Buffett.
- Berkshire Hathaway does not pay dividends to its shareholders despite being a huge, mature, and stable firm.
- Instead, the corporation decides to reinvest its profits in new projects, investments, and acquisitions.
Why does Berkshire not pay dividends?
Given Warren Buffett’s 57-year rule at the helm of the company, investors may question if the company’s hardline dividend policy would change once he stands down. The 91-year-old “Oracle of Omaha” will have to step down as Chairman and CEO at some point.
Will this be enough to persuade Berkshire to issue a dividend, despite Buffett’s assurance that the company would not pay one?
Understanding Berkshire’s No-Dividend Policy: The Buffett Factor
Berkshire Hathaway has a market valuation of more than $600 billion and generates roughly $66 billion in sales annually. Its revenue originates from a wide range of wholly-owned and non-wholly-owned companies, as well as the company’s broad and large equity holdings.
Berkshire has wholly-owned subsidiaries like Duracell, Fruit of the Loom, Precision Cast Parts, See’s Candies, Dairy Queen, and a slew of others, as well as major insurance businesses like GEICO, General Re, and Berkshire Reinsurance.
Berkshire Hathaway has tens of billions of dollars in publicly traded equities, including long-term stakes in Coca-Cola (KO), American Express (AXP), Apple (AAPL), and Wells Fargo (WFC) (WFC).
Berkshire Hathaway has amassed so much investable capital over the years that it has been unable to profitably reinvest it in its own businesses. As a result, huge quantities of money were invested in the company’s highly scrutinized publicly traded portfolio.
“The difficulty is how to value Berkshire Hathaway when it doesn’t pay dividends.” It will also not pay dividends. That’s a promise I’m confident I’ll be able to keep. All you get with Berkshire stock is the ability to keep it in your safe deposit box and fondle it once a year.”
Before going into why Berkshire’s dividend policy might change in the future, it’s important to understand why the business doesn’t pay a dividend right now. Berkshire does not return cash to shareholders in the form of dividends because Buffett does not believe it is a wise use of cash.
While investors may be concerned about the company’s cash flow and question why it isn’t able to distribute some to shareholders, they should remember that Buffett is one of the most successful investors of all time.
Over the course of his nearly six-decade career, he has transformed a struggling textile manufacturing into a corporation worth more than half a billion dollars.
Every dollar of dividend payments received by shareholders would be one dollar less managed by Buffett if Berkshire paid a dividend. Dividends are negative to total returns as a Berkshire Hathaway shareholder unless investors believe they can outperform Warren Buffett.
Buffett is aware of this, and as a result, he opposes dividend distributions. When asked about Berkshire’s only historical dividend payment (in 1967), Buffett joked that he “may have been in the bathroom” at the time the decision was made.
Buffett, though, is 89 years old and will be succeeded as CEO of Berkshire Hathaway in the not-too-distant future. Buffett might start paying a dividend even before he departs Berkshire. Another Buffett comment (the 5-year test below is referring to whether to keep earnings or pay dividends):
(1) During the period, our book-value gain outperformed the S&P 500; and (2)
(2) Did our stock usually trade at a premium to book value, implying that every dollar of retained earnings was worth more than $1? Retaining earnings makes sense if these criteria are met.”
Berkshire Hathaway’s per-share market value increased by 20.0 percent compounded yearly from 1965 to 2020, compared to 10.2 percent compound annual returns (including dividends) for the S&P 500.
This is why Warren Buffett feels he can always find a better use for money than paying it to shareholders.
There looks to be some hope for Berkshire shareholders who want a cash dividend. Buffett’s role will be broken up after his departure, according to the corporation. Berkshire’s investment portfolio will most likely be managed by a group of people, while the CEO and Chairman responsibilities will be filled by another person, or possibly two.
Berkshire has already appointed two portfolio managers, who have overseen the management of ever-increasing volumes of Berkshire’s cash. Todd Combs and Ted Weschler, two ex-hedge fund managers chosen by Buffett, are the individuals in question.
While it is possible that a dividend may be established once Buffett steps down, one cannot help but compare Apple (AAPL) to Apple (AAPL), which had a similar dividend policy while Steve Jobs was at the helm. Jobs led Apple through its worst days, when company was on the verge of bankruptcy, yet he never stopped storing cash in a “rainy day” reserve.
Jobs was adamant about not paying dividends under any circumstances, yet Apple now pays out tens of billions of dollars to stockholders every year.
Buffett is in the same boat. He is the CEO of one of the world’s most successful corporations, which earns large quantities of cash that it does not require for capital expenditures or other purposes. Depending on who succeeds Buffett at Berkshire, the company may easily afford to pay a meaningful dividend.
Whether this happens or not remains to be seen, but the parallel to Apple is reasonable and gives dividend investors at least some hope.
Berkshire: The Cash Factor
The massive quantity of cash and equivalents on Berkshire’s balance sheet has also caused investors to doubt the probability of dividends. Berkshire has more cash than ever before as a result of its great operating performance, and it expands every year, barring large purchases, which Berkshire makes from time to time.
Berkshire Hathaway had over $140 billion in cash, cash equivalents, and short-term investments in US Treasury Bills at the conclusion of the most recent quarter. Buffett wants to retain around $20 billion in cash on hand in case of a major insurance claim, leaving $120 billion for acquisitions or internal investment. This is in addition to the existing equity portfolio of $307 billion. In other words, Berkshire Hathaway has a large quantity of highly liquid capital on hand.
Berkshire also generated $19.5 billion in operational cash flows in the first half of 2021, implying yearly operating cash flow of approximately $40 billion. Berkshire has $5.6 billion in capital expenditures in the first half of 2021, which means it has $34 billion in the bank to invest or refund to shareholders.
Dividend payments would undoubtedly assist to lower these figures, allowing Berkshire’s investors to deploy this capital at a greater rate than the money market rates on its cash and equivalents. Berkshire Hathaway’s cash equivalents are mainly invested in short-term Treasuries, therefore returns on these billions of dollars are minimal.
However, this isn’t always enough to get Berkshire to start paying dividends. After all, the corporation has previously demonstrated its ability to invest funds, so it could simply be waiting for the next big purchase opportunity. There are other corporations that can afford to pay a dividend but choose not to do so.
Berkshire: The Size Factor
Berkshire Hathaway has grown to the point where identifying purchase prospects large enough to shift the needle on its cash pile has become impossible. The present market capitalisation of the conglomerate exceeds $600 billion. Also keep in mind that the company’s balance sheet contains a significant quantity of cash and cash equivalents.
Berkshire’s management will have to focus on very substantial purchases in order to invest any significant percentage of the company’s capital. This creates a situation where the company has so much cash that it can be difficult to invest it all profitably, which we believe is why there is so much cash on the balance sheet lying essentially idle.
As Berkshire expands and makes larger acquisitions, it is more likely that the business will start paying a dividend. The reason for this is because, like Apple, Berkshire is in a position where it can’t spend all of the money it makes, which is exactly when firms start returning money to shareholders. After all, why not return the cash to shareholders if it’s earning 1% (or less) in short-term Treasuries?
Buffett has stated that he has no intention of paying cash dividends to shareholders, although the company has improved shareholder returns in recent years, which may portend a future dividend payment.
Berkshire buys back its own stock when specific valuation criteria are met, and as a result, the float has been decreased slightly in recent years. While this is far from a full capital return program, the fact that Buffett was ready to return any capital to shareholders is, in our opinion, a significant step toward paying a dividend in the future.
Final Thoughts
When Warren Buffett retires, Berkshire Hathaway appears to be more likely than at any previous point in its history to pay a dividend.
When you consider Buffett’s retirement, the company’s expanding size, and even faster-growing cash pile, dividends appear to be a foregone conclusion for Berkshire Hathaway stockholders in the future.
We remain doubtful, however, that the company would pay a dividend in the near future because Buffett is in charge, and fundamental changes in capital allocation strategy particularly one that has been engrained in a company’s culture for about 60 years are difficult to implement.
In Apple’s situation, the corporation started paying dividends just a year after Steve Jobs died, so there is precedent for such a philosophical shift. We don’t believe Berkshire will return cash to shareholders in that time frame, but we wouldn’t rule it out totally.
The Oracle of Omaha has spent half a century constructing the Berkshire Hathaway of today. Berkshire’s cash pile, on the other hand, will eventually become too huge to handle. Berkshire appears to be considering a dividend at this point.
Outstanding investment managers will continue to work for the organization. Furthermore, despite the fact that it hasn’t publicly identified appealing acquisition candidates in a long time, Berkshire has demonstrated a willingness and ability to make significant acquisitions should the proper circumstances arise.
For these reasons, we remain pessimistic that Berkshire will declare a dividend in the near future.
See the following articles for analysis on whether other stocks that do not currently pay dividends will do so in the future:
Does Berkshire Hathaway give a dividend?
That isn’t to say that Buffett isn’t a fan of dividend equities. In fact, most of Berkshire’s top holdings give generous and growing quarterly dividends to Berkshire, which Buffett can reinvest. And, because Warren Buffett is known for keeping his favorite stocks “forever” in a perfect world, dividend growth stocks can yield incredible dividends over time, teaching us about the magic of compounding growth.
Indeed, one of Buffett’s most well-known ventures today pays Berkshire a 50% annual dividend yield on its initial investment. It’s also in one of the safest stocks on the market.
Why companies should not pay dividends?
- Dividends are profits distributed by corporations to their stockholders.
- Dividend payments convey information about a company’s future prospects and performance.
- Its willingness and ability to pay consistent dividends throughout time demonstrates its financial stability.
- A company that is still quickly growing will typically not pay dividends in order to spend as much as possible in future expansion.
- Dividends are not paid by mature companies who believe they can enhance value by reinvesting their earnings.
Why is BRK A so expensive?
Conclusion. The fact that Berkshire Hathaway did not chose to split its stock is the primary reason for its high price. As a result, the price of each share has risen in tandem with the holding company’s massive expansion over the years, and it is currently the most ‘expensive’ publicly traded stock.
Why doesn’t Warren Buffett split stocks?
Warren Buffett, the legendary value investor and CEO of Berkshire Hathaway, has never allowed his company’s Class A shares to be split (BRK-A). He reasoned that doing so would go against his fundamental buy-and-hold investment philosophy.
Simply said, Buffett invests in high-quality firms that have the potential for long-term growth and profit. By refusing to split Berkshire Hathaway’s Class A stock shares, Buffett hopes to attract investors who share his values, especially, long-term investors with lengthy investment horizons.
Do Tesla pay dividends?
Tesla’s common stock has never paid a dividend. We want to keep all future earnings to fund future expansion, so no cash dividends are expected in the near future.
What is Coca-Cola dividend?
For than a century, Coca-Cola has been quenching people’s thirst. The company manufactures and sells its beverages all around the world, with a focus on restaurants, movie theaters, and theme parks. The technique backfired during the coronavirus outbreak, but it’s now paying off as economies recover.
Coca-Cola pays a quarterly dividend of $0.42 per share, resulting in a dividend yield of 3.07 percent. The company’s dividend payout ratio, or the percentage of earnings paid out as dividends, has risen to over 100% in recent years. In particular, a dividend payout ratio of more than 100% is unsustainable in the long run since the company will eventually run out of cash.
Is BRK A The most expensive stock?
Warren Buffett’s Berkshire Hathaway (BRK. A) is the most valuable publicly traded stock of all time, with a share price of $415,000 as of June 2021.
Is Berkshire overvalued?
Growth: With a forward PE ratio of just 20.7 for the next four quarters, the S&P 500 seems considerably more reasonable. Berkshire’s forward earnings multiple of 21.4 is comparable to the S&P 500 as a whole, indicating that the company is fairly valued.
Berkshire’s forward PE ratio is almost half that of its consumer cyclical counterparts, which are now trading at a 14 forward earnings multiple.
For organizations that are rapidly expanding their bottom lines, the growth rate is also crucial. The price-to-earnings-to-growth ratio (PEG) is a useful tool for incorporating growth rates into the analysis. The overall PEG of the S&P 500 is currently around 1, whereas Berkshire’s PEG is 8, implying that Berkshire is currently overpriced based on sales alone.
Another key valuation statistic, particularly for unprofitable companies and growth stocks, is the price-to-sales ratio. The PS ratio of the S&P 500 is at 3.1, almost double its long-term average of 1.62. Berkshire has a PS ratio of 2.4, which is significantly lower than the S&P 500.
Finally, Wall Street experts believe Berkshire shares will hold some value over the next 12 months. The average analyst price objective for Berkshire is $329, implying a 19.8 percent increase from current levels.
The Bottom Line: Based on a selection of standard fundamental valuation criteria, Berkshire stock appears to be slightly undervalued at its present price.
Can you buy a fraction of Berkshire Hathaway?
Although investing may appear to be a difficult subject, there are techniques to make your assets more approachable. Many free stock apps have made investing easier and have democratized access by eliminating stock commissions.
This implies you won’t have to pay a per-trade commission if you buy one share at a time. Some apps will allow you to set aside money on a regular basis to acquire fractional shares, decreasing your investment barrier even further.
Today, you may buy Berkshire Hathaway (BRK.A and BRK.B) shares entirely online using low-cost (or no-cost) brokers.
While I do not recommend that you purchase Berkshire Hathaway stock, this post illustrates how to acquire stocks using the company as an example.
I’d also advocate doing your own stock research and vetting any assets recommended by these providers utilizing stock analysis. Similarly, look at Berkshire Hathaway stock to see if its risk profile and investing objectives align with your overall investment objectives.
Under no circumstances does this article constitute specific investment advice.
