Prolific investor Warren Buffett never split his companyBerkshire Hathaway(BRK.A0,77 %) (BRK.B0,86 %)A shares, and as a result, they recently traded for more than $540,000 per share. While Berkshire's Class B shares are more affordable for retail investors, they trade at about $360 per share. share - this price may still be prohibitive for some.
So let's take a look at what happens when a company splits its stock and whether Berkshire Hathaway, as a nearly $800 billion holding company with a diversified portfolio of companies and stocks, might consider this move in the near term.
What is a stock split?
INstock splitis a corporate action in which a company increases the number of shares outstanding by dividing each existing share into several new shares without changing the totalmarket value. In the event of a share split, your investment remains unchanged, with only the number of shares being adjusted.
Consider this example. If you own 100 shares of a company, each valued at $10, and the company conducts a 2-for-1 stock split, your ownership expands to 200 shares, each valued at $5. Essentially, your investment remains constant even if your share is doubled.
Why would a company split its shares?
One of the most common reasons why companies split their shares is to make shares more affordable to a wider range of investors. When a stock's price becomes expensive, it can discourage smaller investors from purchasing shares. And although many brokers offerfractional parts, prominent ones like Vanguard are not. By lowering the stock price, a stock split makes investing in companies trading at high prices more accessible to retail investors.
In 1996, Berkshire Hathaway introduced its B shares, affectionately called "Baby Bs" by its chairman and CEO.Warren Buffett. These shares were priced at 1/30 of the value of the A shares. Buffett created Class B shares to discourage fund managers from creating a mutual fund-like structure that would sell off parts of the company in smaller chunks.
Berkshire also executed a 50-1 stock split of its Class B shares in 2010, in part to help structure the purchase of railroad company Burlington Northern Santa Fe (BNSF). BNSF shareholders had the choice of receiving $100 or a combination of cash and Berkshire stock, valuing the railroad at $34 billion. Because Berkshire Class B shares were trading above $3,300 at the time of the announcement, Buffett felt the split was necessary to make the transaction easier for retail investors.
Will Berkshire Hathaway split its shares?
Warren Buffett has previously stated that he has no plans to split Berkshire's A shares as it represents his long-term buy-and-hold strategy. At Berkshire Hathaway's 1995 annual shareholder meeting, he noted, "We want to attract shareholders who are as investment-oriented as possible, with such long-term horizons."
As for Berkshire's B shares, Buffett's intentions differ from his position on the company's A shares, seeking to keep the former shares available to smaller investors. Currently, Berkshire's Class B shares are trading at $357 per
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Are Berkshire Hathaway Shares a Buy?
It's generally bad to invest in a company solely because of the possibility of a stock split, as a company's operating performance and financial health play a much more important role in shaping a stock's long-term prospects. Berkshire is doing well. Total revenue from its eclectic subsidiaries rose from $147 billion to $178 billion, or 21%, in the first half of 2023 compared to the first half of 2022.
Additionally, Berkshire's insurance business gives the company access to a pile of cash as it receives premiums up front from its customers. That money – called “float” – is theirs to invest until policyholder claims use it up. As a result, Berkshire had $142 billion in cash and cash equivalents at the end of the most recent quarter.
Using its float, Berkshire can invest in stocks, companies orUS government bonds. In 2023, Buffett has favored the latter option. Berkshire has amassed nearly $100 billion in Treasuries because of their attractive annual yields, which recently topped 5%.
This is the case due to the complicated matters and Berkshire's diverse interestsprice at book valueis a standard measure used to value the stock, withbook valuerepresents a company's assets minus its liabilities. At the time of writing, Berkshire was trading at a price-to-book value of 1.44, higher than the five-year average of 1.35.
Buffett prefers to buy back Berkshire's stock when it falls below 1.2, yet he has withdrawn 12% of the company's outstanding shares through stock buybacks over the past five years, with the shares rarely falling below reach that threshold.
Outstanding BRK.B sharesdata fromYgraphs
Berkshire Hathaway is one of the largest companies of modern times, led by Warren Buffett, one of the most extraordinary CEOs and investors of all time. The stock is trading at an above-average valuation, but higher interest rates mean Berkshire is enjoying sitting on its cash pile more than in the previous decade.
Price-conscious investors may want to watch for a dip in the stock, but either way the stock is well positioned to outperform the market, as it has consistently done under Buffett's leadership.
Collin Brantmeyerholds positions in Berkshire Hathaway. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool has onedisclosure policy.
