Berkshire Hathaway: How They Make Money? (2024)

Even people who know nothing about the stock market have heard of Berkshire Hathaway Inc., possibly because the company's stock is the most expensive in the world. As of this writing (March 2, 2022), its A-class shares (NYSE:BRK.A) are trading at $475,879.

The company was able to achieve this remarkable number partly because they have never split their Class A shares, and they have only paid a dividend once since Chairman and CEO Warren Buffett took his leadership position in 1970. This allows Berkshire to retain its corporate earnings and continually reinvest money into growth.

Berkshire Hathaway Company History & Ownership

To understand how Berkshire Hathaway's stock reached that extraordinary share price, it helps to know a little bit about the company and the people who run it.

In 1839, the stern-faced New England businessman Oliver Chace formed a textile manufacturing company, the Valley Falls Company located in Valley Falls, Rhode Island. 50 years later, in 1889, the company merged with the Berkshire Cotton Manufacturing Company and added its name. In 1955, the company merged once again, this time with the Hathaway Manufacturing Company, and thus Berkshire Hathaway was born.

Following the Great Depression, demand for textiles fell off, and Berkshire Hathaway, now based in New Bedford, Massachusetts, began closing several of its 15 plants. Over in Omaha, Nebraska, a savvy stock trader named Warren Buffett took notice, and in 1962 when he was 32-years-old, Buffett began buying stock in the company.

By 1964, the head of Berkshire Hathaway, the marvelously-named Seabury Stanton, made Buffett a verbal offer to buy back all of Buffett's shares at $11.50 per share. However, when the written offer arrived in Omaha, the price shown was only $11.375, and Buffet saw red.

Instead of selling his shares in Berkshire Hathaway, Buffett bought more shares, enough to finally take control of the company, and one of his first acts of business was to fire Stanton. By 1967, Buffett began investing in the insurance industry, buying the National Indemnity Company, and by the late 1970s, Berkshire Hathaway had acquired an equity stake in the Government Employees Insurance Company, which you may know by its more common acronym: GEICO. In 1985, Berkshire shuttered its last textile operations.

In a 2010 interview, Buffett told CNBC that buying Berkshire Hathaway had been his biggest investment mistake and that it had cost him returns of around $200 billion over 45 years.

What Does Berkshire Hathaway Do?

Today, Berkshire Hathaway is an American multinational conglomerate holding company that is headquartered in Omaha, Nebraska. A conglomerate is a combination of multiple business entities operating in different industries and comprised of a parent company and many subsidiaries. A holding company, or parent company, holds a controlling interest in the securities of other companies and usually doesn't produce goods or services itself.

Ways Berkshire Hathaway Makes Money

Berkshire Hathaway owns and operates a slew of businesses which we'll analyze with the help of Berkshire's FY 2021 Form 10-K. Berkshire's 2021 fiscal year ended on December 31, 2021.

Wholly-Owned Businesses

Some of Berkshire's wholly-owned businesses are:

Insurance Segment

• Insurance revenue: up by 8.3% to $75.1 billion
• Insurance EBT: down by 3.0% to $6.6 billion
• Insurance comprised: over 27% of total revenue
• Insurance EBT comprised: around 20% of total EBT.

Berkshire Hathaway's insurance companies include:

GEICO: a private company that is the second-largest U.S. auto insurer behind only that of State Farm Insurance; it has a famous gecko mascot.

Berkshire Hathaway Primary Group: commercial property and casualty insurance.

Berkshire Hathaway Reinsurance Group: reinsurance for excess-of-loss, quota-share, and facultative reinsurance, which is coverage purchased by a primary insurer to cover a single risk or a block of risks held in the primary insurer's book of business.

Rail Transport Segment

• Rail transport revenue: up 11.6% to $23.3 billion
• Rail transport EBT: up 15.7% to $7.9 billion
• Rail transport comprised: 8% of total revenue
• Rail transport EBT comprised: over 24% of total EBT

Berkshire Hathaway's rail transport company is:

Burlington Northern Santa Fe (BNSF) railroad: together with the Union Pacific Railroad Company, these two railroads hold a duopoly over U.S. west coast rail shipping.

Manufacturing Segment

• Manufacturing revenue: up by 16.3% to $68.7 billion
• Manufacturing EBT: up by 22.9% to $9.8 billion
• Manufacturing revenue comprised: 25% of total revenue
• Manufacturing EBT comprised: around 31% of total EBT

Berkshire Hathaway manufacturers industrial, building, and consumer products with the following companies:

Duracell Inc.: manufacturer of alkaline batteries, rechargeable batteries, specialty power cells, and smart power systems

Lubrizol Corporation: provides additives for engine oils, transportation-related fluids, industrial lubricants, and gasoline and diesel fuel additives; also makes ingredients for personal care products, pharmaceuticals, medical devices, plastics, and specialty resins.

Fruit of the Loom: manufacturer of underwear and casual wear, such as T-shirts, hoodies, jackets, sweatpants, and shorts, and it manufacturers sports equipment sold under the Spalding brand.

Services and Retail Segment

• Segment revenue: up 23.6% to $34.8 billion
• Segment EBT: up 70.5% to $4.5 billion
• Segment revenue comprised: 13% of total revenue
• Segment EBT comprised: around 14% of total EBT

Service businesses include grocery and foodservice distribution, professional aviation training, fractional aircraft ownership, and media and logistics businesses. Retail businesses include automotive products, home furnishings, and consumer products.

FlightSafety International: professional aviation training company, supplier of flight simulators, visual systems and displays to commercial, government and military organizations.

NetJets Inc.: sells fractional ownership shares in private business jets, it was the first private business jet charter and aircraft management company in the world.

Shaw Industries Group Inc.: one of the world's largest manufacturers of carpet, the company has around 22,000 employees worldwide and does over $6 billion in annual revenue.

Helzberg Diamonds: jewelry retailer with over 200 stores across 36 U.S. states.

Dairy Queen: fast-food restaurants which are now known as DQ and serve their famous soft-serve ice cream; they also own the Orange Julius and Karmelkorn brands.

Pampered Chef: a multinational, multi-level marketing company operating in the U.S., Canada, Austria, Germany, and France, it sells a line of kitchenware, tools, food products, cookbooks and gardening tools.

Forest River Inc.: manufacturer of recreational vehicles including the popular Shasta line, cargo trailers, utility trailers, pontoon boats, and buses.

Distribution Segment

• Distribution revenue: up 5.6% to $49.5 billion
• Distribution EBT: down 8.4% to $230 million
• Segment revenue comprised: around 18% of total revenue
• Segment EBT comprised: 1% of total EBT

Berkshire Hathaway's distribution company is:

McLane Company: distributor of grocery and non-food items to convenience stores, discount retailers, wholesale clubs, drug stores, military bases, quick service restaurants, and casual dining restaurants in the U.S.

Real Estate Segment

• Real estate revenue: up 18.8% to $25.0 billion
• Real estate EBT: up by 28.4% to $3.2 billion
• Real estate revenue comprised: 9% of total revenue
• Real estate EBT comprised: approximately 10% of total EBT

Their real estate company is:

Long & Foster: is the U.S.'s largest privately-owned real estate company with more than 11,000 agents in over 220 sales offices located in the Mid-Atlantic and Northeast regions; it is also the largest global affiliate of Christie's International Real Estate.

Investments and Derivatives Segment

Portfolio revenue: up 92.8% or $78.5 billion from 2020's increase of $40.7 billion. Some of the companies Berkshire Hathaway has invested in are:

Bank of America: Berkshire Hathaway owns an 11.9% stake in BofA or BoA, a multinational investment bank and financial services holding company, it is the second-largest banking institution in the U.S. after only JPMorgan Chase, and it is the eighth largest bank in the world; BofA is one of the U.S.'s "Big Four Banks" which are Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo.

Apple Inc.: Berkshire Hathaway owns a 6.3% stake in this multinational technology company that creates consumer electronics, software, and online services; Apple is the largest information technology company by revenue, with US$365.8 billion earned in 2021, and as of January 2021, Apple is the world's most valuable company as well as the second-largest mobile phone manufacturer in the world, Apple is a member of the "Big Five Technology Companies" that include Alphabet, Amazon, Apple, Meta, and Microsoft.

American Express (Amex): Berkshire Hathaway owns an 18.8% stake in this multinational corporation that specializes in payment card services, it is one of the 30 components of the Dow Jones Industrial Average (DJIA), and as of December 31, 2019, Amex had 114.4 million cards in force around the world including 54.7 million cards in the U.S.

Pilot Flying J: Berkshire Hathaway owns a 38.6% stake in Pilot Flying J which is the owner of a chain of U.S. and Canadian truck stops operating under the Pilot Travel Centers, Flying J Travel Plaza, and Mr. Fuel brands; the plazas offer truckers parking, CAT Scales, TRANSFLO Express travel documents, truck washes, audiobook rental, internet kiosks, ATMs, check cashing, laundry, showers, and wireless internet access.

Kraft Heinz Company: Berkshire Hathaway owns a 26.7% stake in this multinational food company that is the third-largest food and beverage company in North America, and the fifth-largest in the world; in 2020, Kraft Heinz did over $26.0 billion in annual sales and popular brands include Boca Burger, Gevalia, Grey Poupon, Oscar Mayer, and Philadelphia Cream Cheese.

The Coca-Cola Company: Berkshire Hathaway owns a 9.32% stake in this multinational beverage corporation that manufacturers, retails, and markets beverage concentrates and syrups, as well as alcoholic beverages; the company operates a franchised distribution system where syrup concentrate is sold to various bottlers throughout the world who hold exclusive territories, the company is part of the DJIA, the S&P 500, and the S&P 100 indexes

Between 2016 and early in 2020, Berkshire Hathaway had large holdings in United Airlines, Delta Air Lines, Southwest Airlines, and American Airlines, but it sold them all as airline stocks dropped due to the Covid-19 pandemic.

Berkshire Today

Berkshire reported sizable numbers for its 2021 fiscal year but acknowledged that some of the revenue and earnings were a reaction to 2020's slump due to Covid.

• Total revenue: $276.4 billion
• Total EBT: $32.2 billion
• Core business revenue: up 12.5% to $276.1 billion
• Investment and derivative contract revenue: up 23.9% to $354.6 billion
• Net earnings attributable to its shareholders: up 111.2% to $89.8 billion
• EBT: up 100.5% year-over-year to $111.7 billion

Since 1970, the Chairman and CEO of Berkshire has been Warren Buffett, who is also known as "The Oracle of Omaha." Buffett will be 92-years-old this coming August. Since 1978, Berkshire's Vice Chairman has been Charlie Munger, who is 98-years-old. On May 3, 2021, Warren Buffett chose Greg Abel to be his successor as CEO of Berkshire Hathaway.

Berkshire's annual shareholders' meetings in Omaha have become known as "Woodstock for Capitalists," and in 2018 have drawn in over 40,000 people. The meetings typically start out with a movie that has starred such Hollywood heavyweights as Arnold Schwarzenegger and Jamie Lee Curtis. The meetings are an opportunity to ask Buffett and Munger questions, and their answers are noted for their astuteness and are usually widely reported.

Bottom Line

Few companies make money as reliably as Berkshire Hathaway. While you may not be able to afford their A shares, as of this writing, their B shares are trading for $316.84, making it possible for investors of average means to become Berkshire shareholders.

As a stockholder, you'd be invited to Berkshire's annual meeting, priceless.

Marcia is a former high school math teacher, technical writer, author, and programmer. She stays on top of worldwide news about science, government policies, finance, infrastructure, and medical issues. She is always "sniffing the wind" for the latest trends and directions, and keeping her readers abreast of these developments.