The more I dig into the history of Berkshire Hathaway, the more it looks like Warren Buffett’s strategy is opportunism vs. innovation. For example, the reason Buffett operates one holding company instead of three was a run in with the SEC, as I explained in an earlier post. The reason he runs Berkshire Hathway instead of just owning it through Buffett Partnerships LLC is an even earlier post.
The latest finding is why Berkshire Hathaway hasn’t paid a dividend since 1965.
Many have asked Buffett this question, either at the Q&A at the shareholder meetings or in interviews with the press. The answer he gives there is “best use of the capital,” as in the return on equity from Berkshire Hathaway beats every other typical investment and thus it is best left in the company to “compound” into higher returns.
He states that too in a letter to shareholders in the mid-1980s, but a few years earlier, in another letter in around 1981 he states another reason. In 1980 America, inflation was running over 15% and Buffett was telling shareholders how the 20% growth at Berkshire Hathaway was barely keeping ahead of inflation. But an even higher and more important percentage he briefly mentioned was the 50% income tax bracket that he, and many of the Berkshire Hathaway investors were paying on their incomes, including dividends (which was down from the 70% tax bracket of the 1970s).
This country has not had income tax rates that high since President Regan’s tax overhaul in 1986. At 50%, it makes economic sense to minimize dividends. If a shareholder doesn’t need them. Otherwise (up to) half of the dividend is paid in taxes, leaving only half to reinvest. Whereas if all after-tax profits are retained by the company, 100% of the money can be reinvested.
This makes more sense at Berkshire Hathaway than at most companies, as Berkshire Hathaway didn’t (and still doesn’t) have to invest it back into its own operations, but can use that cash to invest in other companies, in whole or in part. Which they do. Which is the main driver of Berkshire Hathaway’s growth over the past 50 years.
Ultimately both answers are correct, but the tax answer drives the investment efficiency answer. If there hadn’t been a tax on dividends in the 1960s, 70s, or 80s, Berkshire Hathaway would likely have paid a dividend, and with that likely have been a lot smaller company.