How a company chooses to allocate capital will affect its stock performance over time.
Dividends may be an effective way to regularly reward shareholders for low-growth companies.
Berkshire has become less an investment company, but a conglomerate.
10 Berkshire Hathaway ›
Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) It is a typical value stock in almost every category. It has a diversified portfolio of diverse controlled businesses, equity securities positions and an impeccable balance sheet. But Berkshire never paid a dividend - it's unusual for value-centric companies.
That's why Warren Buffett prefers buybacks over dividends and why I think Berkshire's new CEO (as of January 1, 2026) may change that policy.
Berkshire's average annual revenue was 19.9% between 1965 and 2024, compared with 10.4% at 10.4% at 10.4% S&P 500 Dividends were reinvested. Most of these gains come from savvy stock purchases, acquisitions and reinvestment of their controlled businesses – rather than returning capital to shareholders.
However, Berkshire's board of directors formally authorized a stock buyback program in September 2011. This allowed the company to "price not exceeding the price of the stock at that time's value is above 10%.
The threshold was later changed to a 20% premium. Then, in recent years, the rule has been more or less eliminated, as Berkshire has also repurchased shares for 24 consecutive quarters, even if its price is exaggerated. However, Berkshire has not repurchased any buybacks since the second quarter of 2024 - suggesting that management may not currently view the stock as a convincing bargain.
To understand why Buffett has long tended to use excess capital to buy back shares rather than pay dividends, it is helpful to know different ways companies can use capital.
Most companies borrow money first because they have some really good ideas and need capital to fund those ideas. Then, as they make a profit, they may want to use those profits to take more ideas and grow their business further without taking too much debt.
As companies mature, they may generate more capital than they need, so they choose to return some of this capital directly to shareholders. The two main ways to return capital are stock buybacks and dividends.
Stock buybacks reduce the number of outstanding shares, which increases earnings per share and makes the stock better over time. Repurchases are essentially more bullish bets than dividends because dividends provide a one-time benefit, while repurchases have lasting effects, and capital can be better utilized as long as the stock price goes on over time.
apple and visa Use its vast majority of capital return programs on repos. The strategy has been a huge success given the long-term appreciation of the two companies in terms of value.
By contrast, the long-term Berkshire held Coca Cola Use most of its return on capital programs on dividends. It has 63 years of increased spending.
How a company allocates its capital will affect its investment papers and shareholder expectations. If a company puts all its profits into the business, it will put pressure on these ideas to produce results. However, if it pays a huge dividend, investors may not expect too much return.
When Berkshire is small, it makes sense that there is money to easily reach out for investment opportunities. But Berkshire has been a net seller of stocks in recent years. As of March 31, its cash, cash equivalents and Treasury bills were worth more than its entire public stock portfolio. Its insurance business, BNSF Rail, Berkshire Hathaway Energy, and its manufacturing, services and retail businesses are worth about twice the value of its public equity portfolio.
Today, Berkshire is more like a group than an investment company. Buffett repeatedly stated that it is much more difficult to buy stocks with smaller stocks now because moving needles require too much.
At the time of writing, Berkshire has a market capitalization of $1.11 trillion. This means that if Berkshire bought $11 billion in shares in stock and the position doubled, it would theoretically only affect Berkshire's market capitalization by 1%. So Berkshire is basically limited to making large amounts of stock purchases, like it did successfully with Apple, or just growing its controlled business.
Greg Abel did a great job of expanding Berkshire Hathaway Energy and leading Berkshire Hathaway Energy outside of Berkshire controlled businesses. Most of these businesses are not high octane growth companies. Instead, they are stable staunchers, and if they are independent, they may bring dividends. So if Abel continues to focus on controlled businesses as CEOs are CEOs rather than buying public stocks, it makes sense for Berkshire’s return on capital to reflect this shift.
Given Berkshire's scale and growing revenue from successful asset operations, it should expand its return on capital program to include dividends. However, I want Berkshire to have a lower yield and then pay a lower yield as its operating revenue grows, and then build spending over time.
If Berkshire pays dividends, this will make the investment paper more attractive to people who want to generate passive income from businesses that grow. Since Berkshire has a lot of cash on its balance sheet, it should be able to support stable and growing spending without damaging its financial position.
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Daniel Foelber has no position in any of the stocks mentioned. Motley fool has a place and recommends Apple, Berkshire Hathaway and Visa. Motley Fool has a disclosure policy.
Berkshire Hathaway never paid dividends under Warren Buffett. That's why Greg Abel was originally published by Motley Fool as CEO