The Other Stock Split Buffett Doesn’t Want to Talk About (BRK-A, BRK-B, BNI)

January 21, 2010 by Douglas A. McIntyre

When was the last time that Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) was one  of the more unusual volume movers?  It is today, and you’d have to ask yourself when the last time a split had come out for that answer.  Today is a first, virtually anyhow.  The A-shares are still above the $100,000.00 per share level.  But the B-shares are now trading ex-split to reflect the 50-for-1 stock split and down in the $70’s to aid in the game-changing Burlington Northern Santa Fe (NYSE: BNI) buyout.

This is a subject that will be an unpleasant one for Warren Buffett going forward, but we’d like to discuss the possibilities of a much more universal stock split compared to what we are seeing here today.

The B-shares reflect the stock split and were up almost 3% at the open and had traded more than 300,000 shares at the bell.  At 9:50 AM EST we now have shares up 3.8% at $72.17.  The previous close was put at an adjusted price of $69.52, but that was listed as $3,476.00 on an unadjusted basis.

Buffett said the decision was an easy one to make to split the B-shares to accommodate the BNSF holders so that they would not be put at a disadvantage.  That ‘easy decision’ stance is a change from the past.   The merger was already a game-changer and Buffett called it an all-in bet on the future of America.  The problem is that the A-shares are actually put at a disadvantage on the liquidity now.

At the same time the B-Shares are up, the A-shares are up over 4% at $109,050.00 on about 900 shares.  Second guessing Buffett is not always a fun angle to take, but if this was truly such a game-changing merger, the time has come for Buffett to split the A-shares as well.  Having this much inequity in the shares now makes little or no real sense.  Does that split need to be 50 or 100 for 1? No it does not.  But would a $10,900.00 be far less prestigious than a $109,000.00 stock?  Maybe a bit, but the new normal is not supposed to be about flashing wealth and status symbols if you have read the news over the last year.

The A-shares at this point may represent nothing more than a vanity position.  If Buffett were to split his entire share base to the newer level, the company would be a shoe-in for inclusion as one of the 30 Dow Jones Industrial Average stocks.  It may make the S&P 500 Index based upon today’s split, but the liquidity issues and high insider ownership by Buffett (his trust now) would give it a far lower weighting than its market cap would  otherwise indicate.

This new move today should make it far easier for the public to hold Berkshire Hathaway stock, and even long after Buffett exits the company the company will still be able to tout the same plan and strategy.  Buffett has been against stock splits in the past.  The notion that it makes brokerage commissions come up for debate is an argument of yesteryear.  Almost anyone can now buy shares for close $10.00 all in on commission whether they buy 100 shares or 2,000 shares.  Back in the 1960’s and 1970’s, brokers could charge commissions of 2% or 3% going in.  That day is long gone.  Even in the 1980’s Buffett minded that stock splits draw in short-term traders, yet the $100,000+ mark has reached a point that it is unattainable for most of the public.  The notion that it was once $150,000.00 does not change that argument.

There was once a nation that Berkshire Hathaway should be treated as a mutual  fund rather than an operating company.  This BNSF deal changes that notion entirely, and this move may tend to lead Berkshire Hathaway to owning more operations outright at the expense of just buying and holding common stocks of large US companies.

A split is technically a non-event on true fundamentals.  But at this point it has finally become a stock that the public can own.  The stock has underperformed against the market during the entire recovery.  Buffett still needs to remind these people that he is not going to beef up an investor relations effort nor will he change his accounting and reporting stances.  The public investing in Buffett and Berkshire Hathaway has to know that the transparency is often going to be less here than at other financial and/or conglomerate operations.

It might be easier to ask Buffett to go ahead and split the A-shares than it would be to divide the A-shares out to receive dividends.

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JON C. OGG

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