Buying a share of Berkshire Hathaway Class A costs so much money that it could pay for a person’s entire college education. It can even buy two houses in Omaha, Nebraska. To put it another way, you could purchase 40,000 large Blizzards from Dairy Queen, owned by Berkshire Hathaway.
Why doesn’t Warren Buffett split the stock?
A week ago, the Class A shares of Berkshire Hathaway broke the $200,000 mark for the very first time. Berkshire shares are the highest priced stock on the United States stock market. The CEO and chairman, Warren Buffett, has resisted any urge to split the shares. There’s no reason to even consider that he might change the way he thinks now that they have reached this major milestone.
A company will increase the number of shares outstanding during a stock split. This effectively lowers the price of the shares accordingly. Splits do not change the fundamental value of a company by any means, but they do often turn a stock into a more attractive purchase for retail investors.
The Class A shares for Berkshire Hathaway recently went up 1.1% to reach $201,759. This gave Berkshire Hathaway a market value of roughly $327 billion, we learned according to FactSet.
For many years, Warren Buffett has argued that lower share prices would bring about a lot of short-term, speculative trading to the stock of his company. In a Warren Buffett biography titled The Snowball, Alice Schroeder, the author, chronicled why Warren Buffett – the Oracle of Omaha – was strongly against splitting the stock.
“I don’t want anybody buying Berkshire thinking that they can make a lot of fast money,” said Buffett to Alice Schroeder. “They’re not going to do it, in the first place. And some of them will blame themselves, and some of them will blame me. They’ll all be disappointed. I don’t want disappointed people. The idea of giving people crazy expectations has terrified me from the moment I started selling stocks.”
The argument above has fallen by the wayside since Berkshire decided to issue much cheaper stock in 1996 in the form of Class B shares. The newer shares were worth 1/30 of the Class A shares upon being introduced. They called them the “Baby Bs” and the shares were established because Warren Buffett was trying to outdo fund managers that intended to set up a mutual fund like structure that would sell smaller parts of the company in little slices. In 2010, Warren Buffett split the Class B shares at 50 to 1. He used Berkshire Hathaway stock to help pay for the $27 billion purchase of Burlington Northern Santa Fe Corp.
The Class B shares made it onto the S&P 500 in 2010 right after the split, and they are now currently worth 1/1500th of each Class A share, except in the case of voting rights, where the Class B shares only have 1/10,000th of the voting power. This past Thursday, shares were trading at $134.94.
But there is evidence that Warren Buffett is never going to split the Class A shares, and this evidence has been around for many years, especially since the Class B shares were created.
“My ego is wrapped up in Berkshire,” said Buffett to Fortune Magazine during a 1988 cover story. “… I can gear my whole life by the price of Berkshire.”
Quite interestingly, stock splits have been less popular as more public companies start to think like Berkshire Hathaway and Warren Buffett over the years. Between 2008 and 2013, only 12 of the companies on the S&P 500 split their stock each year, according to S&P Dow Jones indices. In a way to compare, during the 1990s, 64 S&P 500 companies, on average, would split their stock each year. During 1997, there were 102 stock splits in total.
Google and Apple are two recent exceptions that are notable. Both company split their stock this year, with Apple surprising people with a seven for one stock split. Apple shares now trade below $100 per share, and before the split the company was trading above $600. “We’re taking this action to make Apple stock more accessible to a larger number of investors,” said Tim Cook, Apple CEO, this past April.
You should not expect Warren Buffett to utter those words anytime in the future.