Warren Buffett has said that he will never split Berkshire Hathaway stock. With the company's Class A shares recently hitting a record high and trading at roughly $527,400 each, that might come as something of a surprise. However, the Oracle of Omaha has said that he doesn't see any reason to pursue stock splits because they don't boost intrinsic value, and Berkshire's Class B shares are already available at a much smaller price.
On the other hand, it's undeniable that prominent companies have seen significant stock-price gains after announcing and completing stock splits in recent years. With that in mind, a panel of Motley Fool contributors has identified three stocks in the Berkshire Hathaway portfolio worth buying that are either on track to split in the near future or stand out as a potential split candidate.
This tech leader will keep dominating
Keith Noonan (Amazon): With Amazon's stock having skyrocketed roughly 22,000% over the last 20 years, its current price of more than $3,250 per share might look a bit unwieldy. That's not to say the stock looks unfairly valued.
The company's growth engines continue to look incredibly strong, and its forward price-to-earnings (P/E) and forward price-to-sales (P/S) ratios remain not far removed from the lowest levels in the company's history. However, the 20-for-1 stock split that the tech giant will likely carry out in June could have the effect of making the shares much more attractive for retail investors.
While many brokerages now allow the purchase of fractional shares, there does some to be a significant psychological appeal created by splitting stocks down to more manageable prices. There's just something about owning a full share that's more attractive than owning a small piece of a share, even if the actual value of that holding is exactly the same.
As Buffett has implied, Amazon's upcoming stock split won't do anything to directly boost the intrinsic value of the company. However, there could be some indirect benefits that wind up working to the company's advantage.
Despite Amazon's incredible performance over the last two decades, the stock's gain of roughly 6% over the last year has lagged behind gains for the S&P 500 and Nasdaq Composite indexes. If a stock split helps give the company's share price a shot in the arm, that could help to keep employees who are paid with stock happy.
Should you buy Amazon because of its stock split? It's not the kind of thing that even approaches being central to my buy thesis when the tech giant's leadership in e-commerce and cloud services and incredible penchant for innovation are so front and center. However, it also wouldn't be shocking to see the move create some more excitement for what remains an incredibly exciting company.
Glitz and glamour
Daniel Foelber (RH): Warren Buffett has always had a soft spot for retail businesses from his days of working in the Buffett & Son family grocery store as a kid in Omaha, Nebraska. But the upscale nature of RH, formerly known as Restoration Hardware, is nothing like a folksy local shop.
RH is glamorous and wild. Every store uniquely incorporates architectural features that fit its surroundings. The company has been recognized for its design and showmanship. It even has a yacht business. The RH3 luxury yacht will soon be available to charter in the Mediterranean and the Caribbean. And RH1 and RH2 are not yachts, by the way, they are private jets that can also be chartered.
RH has stores that also serve as restaurants and wine bars. Simply put, it is trying to be a brand that is almost nothing like Buffett's humble lifestyle. So why would he be interested in such a glamorous business? Well, that probably comes down to valuation.
RH sales and net income have grown at meteoric rates over the past few years.
Pair that growth with an over 55% drawdown in the stock price, and you have a value stock that looks inexpensive. In fact, RH now has a P/E ratio of just 14.5.
On March 29, RH issued a press release announcing its goal to execute a 3-for-1 stock split:
The Company believes that a stock split is appropriate in view of the substantial appreciation that has occurred in the share price since the 2012 initial public offering. Although a stock split does not change the value of the Company, we believe that a split should have a number of benefits, including the recruitment and retention of talent. The stock split is expected to be executed in the spring.
RH is a bold business that has no problem taking risks and spending money to grow its brand. Its results speak for themselves. A retail store, a wine company, and a yacht and private-jet business might sound unconventional, but it's working.
Time to adjust for the unexpected
James Brumley (Chevron): I know it's not a name many people have suggested for a prospective stock split lately. But I have a feeling that oil giant Chevron might be close to making such a move.
Like most energy stocks, Chevron's shares pretty much fell off the radar in the wake of oil's 2015 meltdown. They stayed off the radar until late last year, too, when demand for oil suddenly recovered but the supply didn't. Along with the strongest crude prices we've seen in years, Chevron shares have rallied more than 40% just since November, reaching record highs. The backdrop of geopolitical tensions also leads me to think oil prices are going to remain lofty for the indefinite future.
The thing is, it's all just happened so fast -- faster than even Chevron and its peers could have anticipated.
Those who know the company's history might recall it does a pretty good job of splitting its stock as needed to keep its price and trading manageable for the average investor. It hasn't felt like it needed to since 2004, as shares have been rather tame the bulk of the time since then.
With the extreme price appreciation we've seen over just the past five months, though, it's arguable this one's overdue for a price adjustment that will make the stock a little less intimidating.