Berkshire Hathaway (NYSE: BRK.A, BRK.B) is a unique company because it's leadership has been careful to instill certain values and approaches to the business operations. As a conglomerate, the business has exposure to many different markets. This is not an insurance business, is not a candy business and Berkshire is not a utility company although it has exposure to these and many other industries.
The partners Warren Buffett and Charlie Munger purchased Berkshire Hathaway textile company just over 51 years ago. Since that time the company has produced billions of dollars in net profits and surplus cash flows, yes has issued just one dividend to shareholders. Why? Well, this is a unique company because of its distinct focus on the security and robustness of its equity position. Berkshire Hathaway has not and will not jeopardize the integrity of its equity value by compromising future cash flows with interest payments or other long-term obligations demanding cash payments of substantial size in proportion to its regular earnings.
Keeping all of owner's earnings - surplus cash thrown off through profitable enterprise - inside of the business is one way the partners have ensured a growing capital base and enhanced the price stability of the company's publicly traded shares. To that end Berkshire has not paid a dividend for over 50 years. But it isn't that Warren Buffett and Charlie Munger are against dividends. They simply believe that so far they are able to create more wealth for owners of the company through the tax-advantaged and operationally advantaged reinvestment of the conglomerate's earnings.
"You should wish your earnings to be re-invested [by the company] if they can be expected to earn high returns, and you should wish them paid to you if low returns are the likely outcome of re-investment." -Warren Buffet
Like I said the partners are not anti-dividend. In fact, Mr. Buffett once laid out a clear rule the company goes by to determine whether or not they will issue dividends. We are going to do a check up on that dividend rule today to learn how close or how far the marketplace is from seeing a Berkshire Hathaway cash dividend.
Five years trailing retained earnings Test
"The five-year test should be: (1) during the period did our book-value gain exceed the performance of the S&P; and (2) did our stock consistently sell at a premium to book? […] If these tests are met, retaining earnings has made sense." -Warren Buffett
Here is the test data for the most recent five-year period, ending at the most recent Berkshire annual report:
Five-year Test Verdict:
During the period did book value gain exceed the performance of the S&P?
Did our stock consistently sell at a premium to book?
So there we have it, the company appears to be well advantaged and will continue to retain all earnings for reinvestment by its administration. I believe that Berkshire Hathaway may one day pay a dividend. But such a time is likely to arrive after a changing of the guard. Until then, shareholders who aim to build wealth will happily permit the company to reinvest earnings on its own accord.
I too will allow the company to reinvest without complaint. From the company's unique position in the market, they have access to wealth building investments that are simply not available to me. I like how Berkshire allows me to reach into parts of the insurance market and other areas in the economy that I otherwise couldn't invest in.
Additional Disclosure: This article represents the opinion of the author as of the date of this article. This article is based upon information reasonably available to the author and obtained from public sources that the author believes are reliable. However, the author does not guarantee the accuracy or completeness of this article. It is merely the author's interpretation of the information contained in the article. The author may close his investment position at any point in time without providing notice. The author encourages all readers to do their own due diligence. This is not a recommendation to buy or sell a security.
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Disclosure: I am/we are long BRK.B.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.