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In its 2021 annual report, Berkshire Hathaway (BRK.A, BRK.B) reported full-year overall earnings of $89.8 billion and a $144 billion cash pile.
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.
Key Takeaways
- Berkshire Hathaway is a large, diversified holding company led by renowned investor Warren Buffett that invests in the insurance, private equity, real estate, food, apparel, and utilities sectors.
- Despite being a large, mature, and stable company, Berkshire Hathaway 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 to improve their efficiency, expand their reach, create new products and services, and improve existing ones.
BRK.A shares have a five-year annualized return of 15.32%, while BRK.B shares have returned 15.38% per year over the same period, as of April 2022. There can be minor differences between the two Berkshire Hathaway share classes due to market dynamics and differing pools of investors.
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.
Other Priorities
In fact, Buffett has said that he has three priorities for using cash that is 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.” (Berkshire Hathaway purchased $27.1 billion of its own shares in 2021.)
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 3,641,613% from 1965 to 2021 compared to the S&P 500 returning 30,209% over the same period.
In 2020, the stock lagged behind the S&P 500 Index. But in 2021, its Class A shares outperformed the index by 0.9%, closing up 29.6% on the year.
Of course, Buffett’s successor—when the “Oracle of Omaha” announces his retirement, if he ever does—might have different thoughts about paying dividends.
On May 1, 2021, Berkshire Hathaway Vice Chairman Charlie Munger unofficially announced that Warren Buffett would be succeeded as chief executive officer (CEO) by Greg Abel when Buffett eventually steps down. Abel is CEO of Berkshire Hathaway Energy and vice chairman in charge of noninsurance operations.
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 more major acquisitions. In March 2022, Berkshire Hathaway announced that it had agreed to buy insurance company Alleghany Corp. (Y) for $11.6 billion, its first takeover since acquiring aircraft and industrial parts maker Precision Castparts Corp. in 2015.
Why doesn’t Berkshire Hathaway pay its shareholders a dividend?
Company founder and CEO Warren Buffett believes profits can generate better shareholder value spent in other ways.
What does Berkshire Hathaway do with retained earnings?
As an alternative to paying dividends, the company chooses to reinvest profits into new projects, investments, share buybacks, and acquisitions.
Has not paying a dividend paid off for investors from a share price perspective?
Berkshire Hathaway’s flagship BRK.A shares have increased by 3,641,613% from 1965 to 2021 compared to the S&P 500 returning 30,209% over the same period.
What are the prospects of Berkshire Hathaway paying a dividend in the future?
Going from Buffett’s past history, it’s unlikely that the company will pay investors a dividend while he remains in charge. There’s every chance that Berkshire Hathaway’s future CEO also decides against paying dividends, especially given Buffett’s track record of creating shareholder value by other means.
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, this suggests that his answer to dividends for shareholders remains a firm “no.”