What do you think whenever Berkshire Hathaway is mentioned in any setting? If you’re like most people, you’re not thinking about the company; you’re thinking about Warren Buffett.
The investment guru who has been known as “The Oracle of Omaha” for a very long time had a huge hand in the transformation of the company into a global investment behemoth.
But it wasn’t always this way, in fact, a few people may be surprised to hear that Berkshire Hathaway existed long before Buffett was born, albeit under another name.
Before the investment guru took over, it used to be a textile manufacturing company.
But today the company is one of the most lucrative listings on the NYSE, with its Class B stocks being in the top 5 on the S&P 500 index.
Also, thanks to Buffett, the firm has never had a stock split and does not plan to. They also have never paid out dividends to their shareholders in their history as an investment firm. These conditions contribute to the asinine value of the company’s Class A shares, which stood at over $300,000 at the end of 2019.
So how did Berkshire get here? How did they transition from textiles to investment and how has their stock grown over the years? Let’s get started.
Berkshire Hathaway – The Company
Berkshire Hathaway was formed in 1839 by Oliver Chace.
Back then it was known as the Valley Falls Company, owing to its establishment in Valley Falls, Rhode Island. Nine decades later, Chace agreed on a merger with another textile mill known as Berkshire Cotton Manufacturing Company.
After the merger, the resultant company changed its name to Berkshire Fine Spinning Associates. In 1955, another merger occurred, this time with Hathaway Manufacturing Company, which was being run by Seabury Stanton.
Now known as Berkshire Hathaway, the company had about 12,000 people on the payroll in 15 plants and had recorded a revenue of over $120 million.
With the decline in the textile industry, this success did not last very long and by 1960, half of those plants had been shut down.
Warren Buffet and Berkshire Hathaway – The Journey
Warren Buffett started purchasing Berkshire Hathaway shares in 1962 through his company, Buffett Partnership, Ltd. He did this with the thinking that the shares would eventually go back up.
After he realized this was not going to be the case, he verbally agreed to sell back his shares to the company at $11½ per share.
However, after a dishonest move by the CEO, Stanton to pay him $11⅜ per share instead, Buffett was displeased.
Warren Buffet, the investor not only refused the deal, but he also began to buy up more shares of the company until he had a controlling stake and then he fired Stanton.
Buffett also went on further to change the name of this investment company to Berkshire Hathaway to position itself as a diversified holding company.
At first, Mr. Buffet tried to keep the company’s textile operations core but eventually, the last of Berkshire’s mills shut its doors in 1985. But by this time, Berkshire Hathaway had already diversified into various other industries.
Some of the new-look company’s earliest investments came in the insurance industry when it purchased the National Indemnity Company and the Government Employees Insurance Company (GEICO) in the 1970s and 1985 respectively.
Since then, Berkshire has grown into a massive multinational holding company. It has a majority stake or full ownership of businesses in retail, home furnishings, electric and gas, confectionery, jewelry, manufacturing and more.
The company owns significant minority holdings in huge companies like Apple, The Coca-Cola Company, Bank of America, Wells Fargo, American Express and more.
Berkshire has whole ownership of GEICO, NetJets, BNSF, Duracell, Dairy Queen, Fruit of the Loom, and Pampered Chef among others.
The company also has large holdings in some major airlines like Delta Airlines, American Airlines, Southwest Airlines, and United Airlines.
Quick Note On The Hathaway/Buffet Modus Operandi
The way Buffett’s mind operates when it comes to investing has been heralded for a long time.
As a testament to his methods, Buffett and his team of like-minded managers have turned up the company’s success and consequently, its share value.
Remember the share price of $11.50 in 1962? As of January 8, 2020, Berkshire’s share price stood at $339,188. This makes them the highest value shares listed on the NYSE.
This success is based on what we like to call the Buffett/Hathaway modus operandi. It has three components: long-term investors, no stock split, and the founder centrism management style.
Warren Buffet and Value Investing – Berkshire Hathaway
Berkshire Hathaway’s immense growth means was brought about by Buffett’s strict adherence to value investing and the fact that Berkshire Hathaway’s stock is structured to only attract very long-term investors.
The holding company has never had a stock split of their Class A shares and has only paid out a dividend once since Warren Buffett.
This has enabled the company to keep the corporate earnings of Berkshire in its balance sheet in a way that mutual funds are not allowed to.
While Buffett and Hathaway do not like to pay out dividends, they sure like to receive them.
With the Class B shares (dividend stock) it owns in different companies, Berkshire raked in dividends worth $3.8 billion in 2018 alone. Some of the companies that pay Berkshire a dividend include PNC Financial, JP Morgan Chase, Store Capital, Wells Fargo, General Motors, Kraft Heinz, and Suncor Energy among others.
So besides favouring long-term investors and not splitting Class A shares, Buffett is also known for his “founder centrism”.
This method of investment entails respect and preference for managers with a founder’s mindset, a passion for extreme value creation, and ethical responsibility towards the shareholders.
Berkshire Hathaway Class A Shares (BRK.A)
At first glance, it is clear that Berkshire Hathaway’s shares are the best performing on the New York Stock Exchange and have the highest ever share price in history.
Since 1965, the company has maintained an average annual growth of 19% in book value to its shareholders.
While the company’s Class A shares (BRK.A) are the most expensive in the world, its Class B shares come in at the fifth position on the S&P 500.
In 1985, the year Berkshire closed its last textile mill, the company’s Class A shares opened at $1275 and closed at $2470. This represented an impressive growth of 93.73%. Making it even more remarkable is the fact that this was a steep transition year for the company.
Although Hathaway’s share price has since skyrocketed to dizzying heights, 1985 remains its highest percentage growth year.
Over the years, the company has had some difficult years. They closed lower than their opening share prices for 1990, 1999, 2008, 2015. But, thanks to their re-focus on value investing and long-term growth, the company has almost always come out on top.
Berkshire Hathaway Class A Shares (BRK.A) – Quick Timelines
In 1981, Berkshire’s Class A shares opened at $425 and closed at $560. In 2019, it opened at $304,057 and closed at $339,590.
This represents a 40-year growth of 60,541.07%.
Nothing like that has ever happened in the history of traditional investing and the stock market.
A brief timeline of Berkshire Hathaway’s Class A share milestones:
Class A share price surpassed $1000 for the first time in May 1983
Nine years later, in November 1992, the share price topped $10,000 for the first time as the company’s market evaluation reached $14.9 billion
In January 1998, the share price topped $50,000 for the first time and the market value stood at $76.4 billion
In October 2006, the BRK.A share price surpassed $100,000 for the first time. The company’s market value reached $162.6 billion
In August 2014, share price topped $200,000 for the first time and company market value reached $338.2 billion
In December 2017, share price passed $300,000 for the first time. The company market value reached $489.4 billion
As is clear by now, 2020 has not been kind to many – if any at all – businesses, what with the global coronavirus pandemic and the consequent effect on the global economy. As of April 3, 2020, Berkshire’s Class A shares closed at $267,954.
Berkshire Hathaway Class N Shares (BRK.B)
In the past 24 years, Berkshire Hathaway’s Class B shares (BRK.B) have also performed well over the years. It also boasts some reputable shareholders. One such would be the Bill and Melinda Gates Foundation that owns 4.0% of the company’s total Class B shares.
In 1997, BRK.B opened at $21.94 and closed at $30.78 (also its highest percentage growth rate of 38.40%).
In 2019, it opened for the year at 202.8 and closed at 226.50. For this 24-year period, the value of the BRK.B has grown by 635.87%.
In keeping with the circumstances of the Class A shares and most others on the NYSE, the BRK.B has experienced an overall dip in value since the turn of 2020. As of April 3, 2020, the Class B shares closed at $178.34.
Of course, there is no data for dividend history, growth or yield because Berkshire Hathaway does not pay out dividends to its shareholders.
As of 2018, the company pulled in revenue of $247.5 billion, with a profit of $4.02 billion, while controlling a total asset value of $707.8 billion.
In practice, it is probably too late for anyone, mostly retail investors, to purchase Berkshire Hathaway stock. However, Buffett’s methods are worth looking into for future opportunities after all he is a legend when it comes to wealth creation and investments.
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.