Will Berkshire Stock Split?

Will Berkshire stock split? Omaha doesn’t have many claims to fame, but one resident is well-known throughout the financial world. That’s Warren Buffett, the “Oracle of Omaha”, who has proven his genius at choosing investments again and again. Buffett oversees the massive holding company Berkshire Hathaway, which he took over back in 1965. 

Under Buffett’s leadership, Berkshire Hathaway (BRK.B) has returned an average of 20.5 percent each year – far more than the S&P 500.

To put that figure into perspective, those who invested $1,000 in Berkshire Hathaway shares in 1965 would have more than $27 million today. That same $1,000 invested in the S&P 500 would be worth “just” $200,000 today. 

Granted, 2020 wasn’t a great year for Berkshire Hathaway, but investors are more than willing to excuse a blip given the extraordinary events of 2020. No one doubts that Berkshire Hathaway will be back to strong returns in the near future. 

A single share of Berkshire Hathaway Class A stock is priced in the hundreds of thousands of dollars today. The price is actually low, according to Buffett, and he has been buying shares back at what he considers bargain prices.

However, those share prices feel high to a lot of investors – especially Class A – and many are asking the same question: Will Berkshire stock split? 

Why Do Companies Split Stock?

There are a variety of reasons that companies choose to split their stocks. One of the biggest is that very high prices make it difficult for traders to move standard 100-share lots. (To sell options contracts as part of covered call strategies for example, shareholders must generally own at least 100 shares).

Other benefits include more stock liquidity, which serves to increase trading volume – and that tends to close some of the bid-ask spread. 

Companies that have an interest in buying back outstanding shares are particularly concerned with narrowing the bid-ask spread.

A large spread means a greater likelihood that share prices will change in the wrong direction between the time a market order is placed and the time it is executed. 

Is a Stock Split Good Or Bad?

In theory, a stock split is neither good nor bad. Shares are divided and current investors own the same stock value before and after the split. For example, if a $90 stock is split 3-to-1, shareholders would own three shares valued at $30 each after the split. 

However, in the real world, stock splits tend to create more interest in the underlying company. After all, when a stock is priced so high that a split is considered necessary, investors feel optimistic about the company’s future prospects.

Take Tesla (TSLA) as an example of a company that split its stock 5:1 and then rallied to pre-split prices within the same year.

As a result, it is common for share prices to go up after a split. Researchers have noted that stocks which have split increased an average of seven percent in the first year after the split and an average of 12 percent within three years of the split. 

How Often Do Stocks Split?

There is no particular pattern or cadence to stock splitting, and some analysts have noted that splits are less common today than they were in the 1980s and 1990s.

There are any number of reasons for that decline, but one of the biggest is thought to be the increase in Exchange Traded Funds (ETFs). ETF shareholders gain access to high-quality assets through low-cost ETF shares, so there is no need for low-priced shares of individual stocks. 

The sale of partial shares has also contributed to small investors’ ability to buy costly stocks. A number of the most popular self-directed online brokerages, also known as robo-advisors, permit investors to purchase stock based on the dollars they have available, rather than the cost of the stock. 

This may discourage some companies from splitting their stock and lowering the per-share price, as there are fewer benefits and more risks. Lower share prices tend to increase the likelihood that day traders will be interested, and more day trading is linked with greater volatility. 

Will Berkshire Stock Split?

One of the biggest differences between Berkshire Hathaway’s Class A and Class B shares is that Class A stock will not split – ever – according to Buffett.

His theory is that allowing a high share price brings like-minded investors to the table, because those willing to purchase at such prices are less inclined to concern themselves with minor market fluctuations.

They aren’t the sort of investors who focus on buying low and selling high over a short period of time. Instead, Class A shareholders tend to be those who want to buy and hold a basket of high-value assets that will return long-term profits. 

Class B shares, on the other hand, have split before and will probably split again someday. Buffett launched the Class B option back in 1996 for the express purpose of making Berkshire Hathaway affordable to smaller investors.

At the time, the company only offered one class of shares that ran about $30,000 each, and too many ordinary people were shut out of Berkshire Hathaway’s success.

That year, Buffett elected to issue 517,500 Class B shares at 1/30 the price of Class A stock. Voting rights and equity were proportionally lower, too, but that is a reasonable tradeoff for those who couldn’t buy in at the Class A rate.

How Many Times Has Berkshire Hathaway Split?

If you consider the creation of Class B shares a split, then that was the first stock split in Berkshire Hathaway’s history under Warren Buffett. However, most investors will say that Berkshire Hathaway Class B shares only split once – in 2010.

That year, Buffett had decided to acquire the Burlington Northern Railroad, and he needed a large quantity of Berkshire stock in small denominations to pay Burlington Northern Railroad’s shareholders. The Class B shares were split 50-to-1, bringing prices down to a mere $68 each. 

Aside from making the railroad acquisition possible, this split benefitted Berkshire Hathaway in another way. The company was admitted to the prestigious S&P 500 market index, which was a win for everyone involved. As soon as credit rating agency Standard & Poor announced the move, Berkshire Hathaway’s Class B shares increased by 7.9 percent. 

Class A shares are unlikely to split at any point, but the purpose of Class B shares is to ensure Berkshire Hathaway stock is affordable for anyone who wants to invest. While a stock split doesn’t appear necessary for Class B shares at this time, a future split is certainly possible. 

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.