A Secret to Buffett’s Success at Berkshire: Issue Little Stock for Deals, None to Employees

Berkshire Hathaway bought Geico entirely for cash over a period of two decades. Above, shareholders pose with the insurer’s mascot at the 2022 annual meeting in Omaha, Neb. (Scott Olson/Getty Images)

One of the underappreciated aspects of Warren Buffett’s leadership of Berkshire Hathaway over the past 60 years has been his sparing issuance of Berkshire stock. That is one reason the original Berkshire stock has risen some 35,000-fold since he took the helm.

Buffett’s reluctance to issue stock reflects his view that his job is to build Berkshire’s intrinsic value per share. The per-share part of that equation is critical; Berkshire stock would likely be at a fraction of its current level if Buffett issued gobs of shares for acquisitions rather than using cash from internally generated profits.

“I would rather prep for a colonoscopy than issue Berkshire shares,” Buffett wrote in his 2016 annual shareholder letter.

This is worth considering with Buffett turning 95 on Aug. 30. He plans to give up the top job at year-end, while remaining chairman.

Since he took over in 1965, Berkshire’s share count has risen just 40% to the equivalent of 1.4 million of Class A shares, with Class B stock converted to an equivalent amount of Class A shares.

The Class A shares, the original Berkshire shares, have risen to about $706,000 from around $20 when Buffett took over in 1965.

Another reason for the small rise in the share count over the decades is that Buffett refuses to issue stock options, restricted stock or any other stock compensation to employees or directors. He has never done so. Everyone at Berkshire gets paid in cash.

In contrast, many technology companies freely issue stock to employees. Their shareholders suffer from the resulting dilution.

Transactions funded with internally generated cash are behind nearly all of the acquisitions and investments that transformed Berkshire from a dying textile business into the world’s largest conglomerate, with a $1 trillion market capitalization. Looking at the major acquisitions—deals have spanned a variety of areas, with insurance, railroads, and electric utilities notable among them—Burlington Northern Santa Fe was largely purchased for cash in 2010. Buffett bought Geico entirely for cash over a period of two decades.

Berkshire has built its large utility business, Berkshire Hathaway Energy, without issuing any stock. That business probably is now worth close to $100 billion.

There have been exceptions, as Buffett acknowledged in his 2016 letter. His worst deal was buying Dexter Shoe for $434 million in stock in 1993, handing over some 25,203 of what are now Class A shares. Dexter’s value, as Buffett wrote, “promptly went to zero” and Berkshire issued stock now worth about $17 billion. Buffett called Dexter “a particularly egregious error.”

Buffett also issued some 272,000 shares to buy reinsurer General Re in 1998 for $22 billion. While Berkshire stock was richly priced at the time, Buffett called the deal a “terrible mistake on my part” because that stock would now be worth about $190 billion.

Far more frequently, Berkshire shareholders have benefited from Buffett’s stingy attitude to issuing shares.

Alleghany got the Buffett treatment in 2022 when Berkshire offered to buy the company for almost $12 billion. During the deal negotiations, Buffett insisted on paying cash, rebuffing attempts by Alleghany’s management and board to include a stock component to make the deal more tax efficient for longtime holders.

Looking ahead, it is likely that if Berkshire does bid for CSX to create a second transcontinental railroad following the Union Pacific/ Norfolk Southern deal, it will entirely be a cash deal. The potential $80 billion involved would be no problem for Berkshire given its cash hoard of over $300 billion.

There’s a lesson here for other companies. Be judicious about stock issuance and commit like Berkshire to building intrinsic value per share.

Write to Andrew Bary at andrew.bary@barrons.com