For more than two years, artificial intelligence (AI) has been the undisputed hottest trend on Wall Street. Software and systems empowered with AI solutions can make split-second decisions without human oversight and positively alter the growth arc for most industries around the globe.
However, AI isn't the only next-big-thing trend investors can't seem to get enough of. Playing a very close second fiddle behind the rise of AI is stock-split euphoria.
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Next to AI, excitement surrounding stock splits reigns supreme
A stock split is an action that allows a publicly traded company to superficially adjust its share price and outstanding share count. These changes are surface-scratching in the sense that they don't alter a company's market cap or in any way affect its operating performance.
Depending on the type of stock split, a company's share price can increase or decrease -- but there's a big difference as to how these actions are perceived by the investing community.
A reverse split, which increases a publicly traded company's share price while subsequently reducing its outstanding share count, is often viewed negatively by Wall Street. The businesses conducting this type of split are usually struggling and angling to keep their stock from being delisted.
In comparison, investors absolutely flock to companies announcing and completing forward stock splits. Most of the businesses reducing their share price to make it more nominally affordable for investors who can't purchase fractional shares are doing so because they've been consistently out-innovating and out-executing their peers.
Additionally, an analysis from Bank of America Global Research found that, since 1980, companies enacting forward splits have averaged a 25.4% return in the 12 months following their announcement. This compares to a more modest 11.9% average return for the benchmark S&P 500 over the same time frame. In short, stock-split stocks outperform, which is why investors are always trying to guess which influential company will be next.
With billionaire Warren Buffett set to step down from his role as CEO of Berkshire Hathaway (BRK.A 1.49%) (BRK.B 1.25%) by the end of the year, it begs the question: Is the first-ever stock split for Berkshire's Class A shares (BRK.A), and second-ever split for the Class B shares (BRK.B), on the docket?
Will Berkshire Hathaway become Wall Street's next stock-split stock?
As of this writing on June 22, Berkshire's Class A shares have never conducted a split. To buy a single share, investors would have to pony up $730,000.
Meanwhile, Berkshire's Class B shares, which boast 1/10,000 of the voting power of a single Class A share, did previously split. In January 2010, the B shares underwent a 50-for-1 split, which made its stock more easily accessible to everyday investors. More importantly, this split was necessary to facilitate the cash and stock acquisition of railroad giant Burlington Northern Santa Fe, which most folks know better as BNSF.
In the 60 years the Oracle of Omaha has been Berkshire Hathaway's CEO, he's been staunchly opposed to splitting his company's Class A shares. In the eyes of Buffett, keeping a nominally high share price on his company's Class A shares discourages short-term trading activity and incites the long-term ethos that he and late right-hand man Charlie Munger infused into the corporate culture.
Buffett has enhanced this long-term ethos by repurchasing nearly $78 billion worth of his company's stock (Classes A and B, combined) between July 17, 2018 and June 30, 2024. Buying back stock and reducing the number of shares outstanding has incrementally increased the ownership stakes of existing shareholders, as well as provided a lift to Berkshire Hathaway's earnings per share.
But with Warren Buffett announcing his intent to retire as CEO by the end of year and step into the role of executive chairman, the question again arises: Will Berkshire Hathaway stock -- specifically the Class A shares -- finally split?
While nothing can be said with 100% certainly, I'd gladly go on record as suggesting there's a 99.99% certainty that Buffett's successor Greg Abel is going to maintain the corporate culture that's made Berkshire Hathaway so successful. This includes not paying a dividend, buying back stock (when it makes sense to do so) to support long-term shareholders, and not splitting Berkshire Hathaway's Class A or B shares.
With Berkshire Hathaway sitting on a record $347.7 billion in cash, cash equivalents, and U.S. Treasuries, there's also no need for incoming CEO Abel to consider using Berkshire Hathaway's stock as capital for future acquisitions. This rules out the need for a BNSF-type deal where the company's Class B shares need to be split to facilitate a transaction.
Warren Buffett will stepping down as CEO by years' end. Image source: The Motley Fool.
There will be changes, but a stock split isn't on the docket
Although an Abel-run Berkshire Hathaway isn't going to become Wall Street's next stock-split stock, changes will be made.
The most front-and-center of these changes is that Abel, not the Oracle of Omaha, will have the final say on acquisitions and sizable investments. Abel helped facilitate Berkshire's sizable investments in Japan's five trading houses, so he's no stranger to locating value or helping to put sizable amounts of Berkshire Hathaway's capital to work.
The other major change, which we've actually been witnessing for years, is a more active trading role from Buffett's top advisors, Todd Combs and Ted Weschler. Even though Buffett, Munger, and now Abel, have shared a long-term vision, with eight of Berkshire's investment holdings deemed as "indefinite" by Buffett, Combs and Weschler tend to be a bit more active moving in and out stocks.
Combs and Weschler have also been more willing to invest in growth stocks and/or businesses that have above-average earnings multiples that would, typically, have scared away the value-oriented Oracle of Omaha. Though this doesn't mean Berkshire Hathaway has become a growth investment portfolio in any way, it wouldn't be a surprise to see tech stocks or non-tech, brand-name growth companies become a regular part of Berkshire's investment portfolio following Buffett's retirement as CEO.
