Why does Berkshire Hathaway insist on not paying dividends? Do its retained earnings truly create more than a dollar of value for shareholders for every dollar kept?

Why Does Berkshire Hathaway Insist on Not Paying Dividends?

Berkshire Hathaway has maintained a no-dividend policy since Warren Buffett took control, rooted in core principles of value investing. Buffett has repeatedly emphasized in his shareholder letters that dividends aren’t always optimal, especially when management can reinvest retained earnings efficiently. Key reasons include:

• Superior Reinvestment Opportunities: Buffett argues that if a company can convert each dollar of retained earnings into more than one dollar in market value, dividends become suboptimal. Dividends impose tax burdens (dividend taxes) on shareholders and force them to seek external investments, which may underperform Berkshire’s internal opportunities. He first articulated this in his 1967 shareholder letter and reinforced it thereafter.

• Tax Efficiency: Dividends trigger immediate taxation, while retained earnings reinvested by the company (e.g., acquiring businesses or stocks) defer taxes and enable compound growth. Buffett views taxes as an "interest-free loan," highlighting the long-term tax advantages of retention and reinvestment.

• Maximizing Shareholder Value: Berkshire prioritizes long-term value creation over short-term cash returns. Buffett notes that many shareholders prefer this model, as they can sell shares when needing liquidity rather than relying on dividends. This also avoids market volatility or managerial short-termism induced by dividend policies.

• Historical Context: Originally a textile firm, Berkshire transformed into a holding company after Buffett took control in 1965. He shuttered inefficient textile operations and redirected capital to high-return sectors like insurance and consumer goods. This exemplifies the no-dividend strategy: concentrating capital where it generates superior returns.

In summary, the no-dividend policy is central to Berkshire’s value investing philosophy, aiming for exponential wealth growth through internal reinvestment rather than capital dispersion.

Do Retained Earnings Truly Create Over $1 in Value per Dollar Retained?

Yes, Berkshire’s historical data and Buffett’s analyses confirm that retained earnings have consistently generated market value far exceeding one dollar per dollar retained. This isn’t theoretical but validated by long-term performance. Buffett frequently employs the "one-dollar test" in shareholder letters: each dollar retained should create at least one dollar in market value growth.

• Buffett’s "One-Dollar Test": Introduced formally in his 1983 shareholder letter, this metric compares Berkshire’s per-share retained earnings with share price appreciation. A ratio >1 indicates value creation. Historically, Berkshire consistently passes this test. For example, from 1965–2023, its CAGR was ~20%, vastly outperforming the S&P 500’s ~10%. This reflects efficient reinvestment (e.g., acquiring GEICO, Coca-Cola).

• Quantitative Evidence:

  • Market Cap Growth vs. Retained Earnings: Berkshire retained ~hundreds of billions in earnings since 1965, while its market cap grew from millions to nearly $1 trillion. Buffett noted in 2018 that each dollar retained averaged $2–3 in market value creation.
  • Benchmark Comparison: Had Berkshire paid dividends, shareholders might have invested at market-average returns (e.g., S&P 500). But Berkshire’s internal returns were higher. Example: 1964–2022 saw Berkshire shares surge 3,787,464% versus the S&P 500’s 24,708% (dividends included), proving reinvestment outperformed the market.

• Risks and Exceptions: Buffett acknowledges not all companies pass the "one-dollar test." If management can’t allocate capital efficiently, dividends or buybacks may be preferable. Berkshire avoids this via disciplined capital allocation (e.g., prioritizing wholly-owned acquisitions over stock investments). Recently, as Berkshire grew, Buffett increased buybacks (not dividends) to supplement retained earnings’ value.

• Shareholder Perspective: Long-term holders (e.g., since the 1960s) benefited enormously, with wealth compounding exponentially rather than relying on annual dividends. Buffett stresses this suits patient investors trusting management.

Overall, Berkshire’s retained earnings not only surpass the "one-dollar threshold" but also exemplify value investing, demonstrating the power of long-term reinvestment—contingent on exceptional management and a unique business model.