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What Does Berkshire Hathaway's Stock Split Mean To Investors?

January 16, 2010 | About:
Bill Freehling

Bill Freehling

12 followers
This coming Thursday may offer an opportunity to Berkshire Hathaway investors unlike any since May 8, 1996.

On May 7, 1996, anybody who wanted to buy a single share of Warren Buffett's company would have had to pony up about $33,000.

But that May 8 -- as Bill Clinton contemplated his re-election strategy, Larry Page and Sergey Brin started work on a search engine that would become a verb, and final preparations were made for the Atlanta Summer Olympics -- Berkshire Hathaway suddenly became more in reach for small-time investors.

That was the date on which Berkshire issued a second class of stock -- B shares. The new shares would be worth 1/30th of the A shares. When BRK-B opened for trading on May 9, shares went for $1,110.

This Thursday it appears that the "Baby Berkshires" will be even more accessible to small investors.

Berkshire shareholders will gather in Omaha on Wednesday to vote on splitting the B shares -- which now trade for around $3,250 -- 50 to 1. The vote is being taken to facilitate Berkshire's purchase of Burlington Northern Santa Fe Corp., as it would allow smaller BNI shareholders to get Berkshire B stock should they choose that instead of cash. But the Berkshire board has also made clear that it supports splitting the stock regardless of whether the BNSF deal goes through. BNSF shareholders are scheduled to vote on the $100-a-share offer Feb. 11, and the deal is expected to close in the first quarter.

It's a near certainty that the split will be approved Wednesday in Omaha. Buffett controls about a third of the voting power, and he's made clear that he favors the split. Other shareholders will follow.

Though Berkshire hasn't announced when the split will actually occur, the Associated Press is reporting that it will happen Thursday. Buffett didn't comment for the article.

Post-split, assuming there isn't much movement in the price beforehand, BRK-B shares will trade for about $65 each -- by far the most affordable they've ever been. It's been several decades since an A share traded that cheaply.

Buffett has stated repeatedly that he doesn't like stock splits, because he doesn't want shareholders who care whether they own two shares worth $3,250 each or 100 shares worth $65 each. But the fact is, most investors aren't blessed with the 100 percent rational and logical mind that has made Buffett so successful. In other words, many investors do care about owning more than a single share or two of an individual stock. Most like to buy in lots of at least 100 shares.

As a personal example, I covered the Berkshire Hathaway meeting last year for the newspaper I work at in Virginia. Wanting to work a local flavor into my writing, I tried to find some area Berkshire shareholders who were going to the meeting. I asked around to all the stockbrokers I know in my area, and not one could find a Berkshire shareholder heading to Omaha. A common answer I received was that most small-scale investors weren't willing to pay thousands of dollars for a single share of anything.

Now they won't have to. B shares will now trade for about 1/1,500th of A shares, and the stock will be more liquid than in the past. That could mean Berkshire gets added to the S&P 500, which would create buying pressure from the index funds that track the S&P.

Does this mean that Berkshire's stock price will spike because of the split? Not necessarily. As Buffett says, the size of the Berkshire earnings pie will still be the same regardless of how many pieces it gets sliced into. In the long run the stock price will be determined by the company's earnings and investors' confidence in its future. Further, the big-time investors that control most of the market aren't going to get excited because they can buy shares for $65 instead of $3,250. The A shares aren't being split.

It does seem, however, that the split could create a short-term jump in trading volume, especially if the company gets added to the S&P. May 1996 provides a precedent for that.

On the first day BRK-B shares traded on the open market, trading volume was 85,800 shares. On day two it was 21,100, and on two of the next three days it was over 10,000. And then trading volume slumped as the excitement waned, and it wasn't until January 1997 that it hit five figures again.

In a purely rational world, the one in which Buffett resides, Thursday's split would be a non-event. But in the real world, the one in which numerous people have e-mailed me to ask whether they should buy Berkshire before or after the split, it means Berkshire will be more accessible to the masses.

What that means for the stock price, if anything, remains to be seen.

About the author:

Bill Freehling
Bill Freehling
For gurufocus.com
freehling@hotmail.com

Rating: 4.0/5 (29 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 4 years ago
Yes, "in theory" splits shouldn't matter. In reality, those that might have bought a single B share in the past (apparently they didn't know they could) may now opt for a full lot of 100.

Moreover, even the S&P indexing committee apparently believe splits that create liquidity matter as isn't the lack of liquidity of BRK the primary reason for its exclusion from the index?

So, I won't be surprised if new demand materializes.
my jojo
My jojo - 4 years ago
This is just a case of nothing more than he didnt have the money to buy a new toy so he is doing what he has always claimed is not good for a companies value and now we have him needing money for his new pony of greed taking it apart to use it for cash ie a dollar bill. Why not trade off the B shares without the split? because he doesnt have the right number of shares. This is the Greed we all love about Full of himself Buffet. the legend in his own mind

pt

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