Prolific investor Warren Buffett has never split his company's Berkshire Hathaway (BRK.A 0.04%) (BRK.B 0.30%) Class A shares, and as a result, they recently traded for over $540,000 per share. While Berkshire's Class B shares are more affordable to retail investors -- they trade at roughly $360 per share -- that price can still be prohibitive to some.
So let's 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 businesses and stocks, might consider this move in the near term.
What's a stock split?
A stock split is a corporate action in which a company increases the number of its outstanding shares by dividing each existing share into multiple new shares without changing its overall market capitalization. In the event of a stock split, your investment remains unaltered, with only the number of shares being adjusted.
Consider this example. If you hold 100 shares of a company, each valued at $10, and the company executes a 2-for-1 stock split, your ownership will expand to 200 shares, each carrying a value of $5. In essence, your investment remains constant even though your share count has doubled.
NYSE: BRK.A
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Why would a company split its stock?
One of the most common reasons companies split their stock is to make shares more affordable to a broader range of investors. When a stock's price becomes expensive, it can deter smaller investors from buying shares. And even though many brokerages offer fractional shares, prominent ones like Vanguard do not. By reducing the share price, a stock split makes investing in companies trading at high prices more accessible to retail investors.
In 1996, Berkshire Hathaway introduced its Class B shares, endearingly referred to as "Baby Bs" by Chairman and CEO Warren Buffett. These shares were priced at 1/30th the value of the Class A shares. Buffett created Class B shares to deter fund managers from setting up a mutual fund-like structure that would sell slices of the company in smaller pieces.
Berkshire also completed a 50-for-1 stock split of its Class B shares in 2010, in part to help structure the acquisition of railroad company Burlington Northern Santa Fe (BNSF). BNSF shareholders had the choice to receive $100 or a mixture of cash and Berkshire shares, which valued the railroad at $34 billion. Because Berkshire Class B stock traded for over $3,300 at the time of the announcement, Buffett deemed the split necessary to make the transaction easier for retail investors.
Will Berkshire Hathaway split its stock?
Warren Buffett has previously stated that he has no intention of splitting Berkshire's Class A shares as it represents his long-term strategy of buying and holding. He noted at the 1995 annual Berkshire Hathaway shareholders' meeting: "We want to attract shareholders who are as investment-oriented as we can possibly obtain, with as long-term horizons."
Regarding Berkshire's Class B shares, Buffett's intentions diverge from his stance on the company's Class A shares, where he aims to keep the former shares accessible to smaller investors. Presently, with Berkshire's Class B stock trading at $357 per share, the level of affordability seems reasonably manageable, meaning investors should not anticipate a stock split from Berkshire in the near future.
Image source: The Motley Fool.
Is Berkshire Hathaway stock a buy?
It's generally ill-advised to invest in a company solely because of the possibility of a stock split as a company's business performance and financial health plays a much more substantial role in shaping a stock's long-term outlook. Berkshire is doing just fine. Total revenue from its eclectic subsidiaries jumped 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 because it receives upfront premiums from its customers. This cash -- called "the float" -- is theirs to invest until policyholders' claims deplete it. As a result, Berkshire had $142 billion in cash and cash equivalents at the end of its most recent quarter.
Using its float, Berkshire can invest in stocks, companies, or U.S. Treasury bills. In 2023, Buffett has preferred that last option. Berkshire has amassed nearly $100 billion in Treasury bills due to their attractive annual yield, which recently exceeded 5%.
Because of Berkshire's complicated businesses and diverse holdings, its price-to-book value is a standard metric used to value its stock, with book value representing a company's assets minus liabilities. As of this writing, Berkshire traded at a price-to-book value of 1.44, higher than its five-year average of 1.35.
Buffett prefers to buy back Berkshire's stock when it falls below 1.2, yet he has retired 12% of the company's outstanding shares through share repurchases over the past five years when the stock was rarely below that threshold.
BRK.B Shares Outstanding data by YCharts
Berkshire Hathaway is one of the greatest businesses of the modern era, led by Warren Buffett, one of the most extraordinary CEOs and investors ever. The stock is trading at a higher-than-average valuation, but due to the higher interest rates, Berkshire is benefiting from sitting on its pile of cash more than in the previous decade.
Price-conscious investors may want to watch for the stock to dip, but in any case, the stock is well-positioned to outperform the market, just as it has consistently achieved during Buffett's leadership.
