Buffett’s Berkshire hits record high at $200,000 a share
Why won’t he split the company’s stock?
New York (AFP) – Shares in US investment star Warren Buffett’s Berkshire Hathaway group topped $200,000 apiece for the first time Thursday, less than eight years after breaking the $100,000 barrier.
Already the priciest on US markets, Berkshire shares got even more expensive for investors in a 7.5 percent climb since the company announced record quarterly earnings at the start of August.
In midday, trade Berkshire A shares were up $2,495.64, or 1.3 percent, to $202,104.64.
Buffett has become a legend for the performance of Berkshire, which has a large number of majority and minority investments in everything from small jewelry and furniture retailers to insurance giants Geico and General Re, chemicals group Lubrizol, Coca-Cola, IBM, American Express, Wells Fargo Bank and dozens of others.
The company’s long-term gains have made Buffett the world’s third wealthiest man, his fortune worth $65.9 billion, according to Forbes magazine.
After crossing the $100,000 line in October, 2006, Berkshire shares have easily outperformed gauges like the S&P 500 broad-market index, up only 43 percent since then, further burnishing Buffett’s star as the ‘’Oracle of Omaha,’’ the Nebraska city where he lives.
S&P Dow Jones index analyst Howard Silverblatt rued not having bought Berkshire shares early on.
‘’Warren has returned 22.6 percent per year compounded since it crossed $100 in May 1977 — the month I started at S&P,’’ Silverblatt said.
‘’I should have indexed my pay check against it — (I) would be making almost half-a-million dollars a week.’’
But the company’s future remains under a huge question mark, of who will replace Buffett, 83. He has not said when he will retire but regularly says a solid succession plan has been mapped out.
To make the shares more accessible to small investors, Berkshire created a second class in 1996 when the A shares rose to around $33,000 each. The B shares, labeled ‘’Baby Berkshires’’ at the time, went out at just $1,000.
Eventually they grew out of reach of small market players, and underwent a 50-to-1 split in 2010, a move also made to help the company finalize its takeover of Burlington.
One share of Berkshire Hathaway’s Class A stock is so expensive that it could pay for an entire college education. Or two houses in Omaha, Neb. Or roughly 40,000 large Blizzards at Berkshire-owned Dairy Queen.
So why on earth hasn’t Warren Buffett split his company’s stock?
Shares topped $200,000 on Thursday for the first time, making Omaha-based Berkshire by far the highest-priced stock in the US market. Mr. Buffett, the company’s chairman and chief executive, has long resisted any urge to split the Class A shares and there’s little reason to think the latest milestone will change that line of thinking.
In a stock split, a company increases the number of shares outstanding while lowering the price accordingly. Splits don’t change anything fundamentally about a company or its valuation, but they tend to make a company’s stock more attractive to retail investors.
Berkshire’s Class A shares recently rose 1.1% to $201,759, giving Berkshire a market value of about $327 billion, according to FactSet.
Mr. Buffett for many years argued that lower-priced shares would prompt short-term, speculative trading in his company’s stock. In a biography of Mr. Buffett, The Snowball, author Alice Schroeder chronicled why the so-called Oracle of Omaha was so dead-set against a stock split.
“I don’t want anybody buying Berkshire thinking that they can make a lot of money fast,” Mr. Buffett told Ms. 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 first started selling stocks.”
But that argument has fallen by the wayside ever since Berkshire issued much cheaper Class B shares in 1996. Worth 1/30th of a Class A share when they were introduced, the so-called “Baby Bs” were established because Mr. Buffett was looking to outfox fund managers who wanted to set up a mutual-fund like structure that would sell slices of the company in smaller pieces. Then, Mr. Buffett split the B shares 50-for-1 in 2010, when he used Berkshire stock to help pay for the $27 billion acquisition of railroad Burlington Northern Santa Fe Corp.
The B shares, which were added to the S&P 500 in 2010 following the split, now have the rights of 1/1,500th of a share of Class A common stock (except when it comes to voting rights, where the Bs have 1/10,000th of the voting rights of a Class A share). On Thursday afternoon, they were trading at $134.94.
But the evidence that the Berkshire chairman would never relent to splitting the Class A shares has been around for many years before the creation of the B shares.
“My ego is wrapped up in Berkshire,” Mr. Buffett told Fortune magazine in a 1988 cover story. “…I can gear my whole life by the price of Berkshire.”
Interestingly, stock splits have waned in popularity as more public companies have moved toward Berkshire’s line of thinking in recent years. From 2008 through 2013, only 12 S$P 500 companies, on average, split their stocks each year, according to S&P Dow Jones Indices. By comparison, in the 1990s, an average of 64 companies in the S&P 500 split their stocks each year. In 1997, there were 102 total stock splits.
Apple, Inc. and Google Inc. are two recent notable exceptions. Each completed stock splits this year, with Apple raising eyebrows by splitting its stock 7-for-1.
Apple now trades below $100 after earlier this year – before the split – trading above $600. “We’re taking this action to make Apple stock more accessible to a larger number of investors,” Apple CEO Tim Cook said in April.
Don’t expect Mr. Buffett to utter those words anytime soon.