NEW YORK (Reuters) - Billionaire Warren Buffett surprised investors on Tuesday when he backtracked on a long-standing aversion to splitting the stock of his company, Berkshire Hathaway (BRKa.N) (BRKb.N).
In a letter to shareholders in 1983, Buffett said splitting the stock could attract “inferior” investors, and had stuck to that tune until now.
On Tuesday, the company announced plans for a 50-to-1 stock split, to apply to Berkshire’s “B” shares, and lowering the price of the stock from $3,325.35 at Tuesday’s close, to roughly $67 a share, potentially opening the floodgates to new investors.
The company’s A shares, which closed at $100,450 apiece on Tuesday, will not be subject to the stock split.
The split was announced in tandem with Berkshire reaching a $36 billion deal to buy Burlington Northern BNI.N railroad.
Is this a good time to buy Berkshire stock, especially given the lower post-split price of the “B” shares? Three investment advisers weigh in:
“I think the stock is quite cheap. It (A shares) should be trading for around $125,000 a share. And it is a very low risk time to get into the stock.
“Firstly, the ratio-to-book value is very cheap, and secondly, book value is going to go up as investments he has made recently pay off. And with Burlington Northern you are taking a bunch of cash that is yielding 1 percent or less and turning it into an immediate yield of 6 percent to 7 percent. You don’t have much risk of the numerator not moving up.”
Check, calculates the stock, based on third-quarter estimates, is valued at about 1.25 times book value versus an average of 1.5 times book value over the past five years.
DENNIS GARTMAN, AUTHOR/PUBLISHER OF THE GARTMAN LETTER AND
“Mr. Buffett has always said he had no intention of splitting the stock. Doing this is a serious weakness on Berkshire’s part. All a stock split does is entice weaker hands into buying the shares.
“I would not consider this an opportunity to buy. I think the decisions that have been done are not good decisions. He is splitting the stock, and paying a premium for a railroad when he has in the past always demanded a discount, and running his cash position down. I don’t see how you can see this as anything other than detrimental to the share price.”
“A wise investor who has a long-term position in that stock would probably do well to reduce his exposure.”
Gartman said the stock split would also likely increase options activity in Berkshire’s stock.
“I think the stock for Berkshire is clearly worth a lot more than where it is at right now. I think it is worth $140,000, $150,000 a share.
“The Burlington deal is a very good deal for everyone. BNI shareholders are getting Berkshire stock that is under-valued, access to Warren, and this incredible company with diverse revenue (sources). And it is wonderful for Berkshire shareholders, who are getting a good company where cash can be put to work. It is a win-win all the way around.”
“Clearly people are going to be surprised with the stock split announcement. But clearly he (Buffett) thinks the Burlington transaction is so attractive as to warrant it. And he did not want to force the smaller holders of Burlington to have to accept cash. This is unusual, but it is perfectly in line with Warren being concerned that all shareholders have the same treatment.”
Reporting by Lilla Zuill, editing by Leslie Gevirtz