Warren Buffett recently announced that the Class B shares of Berkshire Hathaway are going through a 50 to 1 stock split, which is the first time he has split Berkshire stock – something he has claimed for years he wouldn’t do. Buffett has stated multiple times that he prefers not to split stocks because the higher prices make it less likely that day traders will cause major price fluctuations. He changed his mind this week though, after Berkshire’s acquisition railroad company Burlington Northern Santa Fe for a mix of cash and stock. Splitting the stock was a byproduct of the deal and was done for tax reasons.
What is a stock split?
A stock split is just what it sounds like – the stock is split into multiple parts. It actually doesn’t change the overall value of the stock, just the number of shares. For example, if you have a $100 stock and the company does a 2 to 1 stock split, then the original share is now two shares valued at $50 each, which still equals $100. But in the case of the BRK.B stock, it is a $3,425 stock (Friday’s closing price) being split into 50 shares, valued at $68.50 each. (As an interesting note, the Class A share of Berkshire trades for over $100,000).
This shouldn’t change the overall value of the shares, but it will make it much easier for the average investor to purchase shares of the Berkshire B stock, as not everyone can come up with $3,400 to purchase one share. But when the stock splits on Tuesday, people will be able to pick up shares for less than $100, which makes it easier for the average investor to purchase shares.*
*Partial share investing. Some online brokers, including ShareBuilder and a few others, offer investors the opportunity to purchase partial shares of stock, so in the case of BRKB, one could have already been making purchases of partial shares before the stock split. However, not all brokerages offer this.
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{ 12 comments… read them below or add one }
I had to make a contribution to a Sep IRA for tax deductions last year, and had enough to buy one share of BRK.b. I know it will be some time to see the growth, but it would be neat to have 50 shares now instead of the one. Now I just need to work on buying the A share.
Like when Buffett added the B Class shares to start with, now Berkshire is a little less prestigious and unique. Some things just shouldn’t be open to everyone and Berkshire Hathaway shares are one of them. Buffett should have stayed true to his convictions and not split the stock price.
I am curious what is going to happen to BRK when their spokesman, the Oracle, eventually passes away. I know he has a successor but there is something to be said when he gets on CNBC and explains his decisions.
As a fellow B shareholder, I’m also shocked that he did this after saying for years how much he was against a split. But now more people will have access to the shares and it’ll be interesting to see if more people moving into it will cause any movement.
Can anyone explained these “tax reasons” that lead to the splitting of the stock?
According to a CNN article I read it was so smaller shareholders of Burlington Northern Santa Fe wouldn’t take as much of a hit when they receive the Berkshire stock. To be honest, I’m not sure how that part of the deal works. The article also references a video interview with Buffett, which I haven’t had time to watch.
But I think it’s interesting that BRK.B is splitting after Buffett has been opposed to it for so long.
Ah, that makes sense.
If you’re involved in a deal like that, anything that can’t be made even through the deal is just cashed out.
i.e. if the company is doing a 10 shares for 1 share purchase, and you have 25 shares, you’ll get 2 of the new company and the other 5 shares you get cash for. This can lead to capital gains that you have to recognize and can also be a major PITA to keep track of going forward.
Still, with BNI trading at almost $100, I’m surprised they split BRK.B as low as they did.
This will make shares more trdble and my bet is you will see $100 shares shortly after the split. I am a buyer in antcipation of the split
Oy.
Stock splits don’t change the value of a company. It decreases the earnings by the same amount of the split per share, so each share is indeed worth 1/x the amount of the old shares.
Sometimes there is a small irrational jump after a split due to increased interest, but the magnitude you’re suggesting would be ridiculous.
It’s especially unlikely due to the A/B structure of BRK shares. Any A share can be converted to 30 B shares (to be 1500) upon request, so it provides a convenient method for arbitrage. So if the B shares jumped irrationally, all the A share holders would convert their shares to make the free bucks, flooding the market with B-shares and driving the price down.
So unless you expect the irrational behavior to be *so* strong that it pushes the value of A shares to $150K+, I wouldn’t bet on B-shares reaching $100.
Hey Ryan, long time no talk! Thank you for the link!
i bought 1 share of Berkshire Hathaway – B share today. There will be a stock split 50:1. So would i get 50 share by tommorrow for the one share i bought today? i appreciate if somebody answers
Yes, but each share will be worth 1/50th as much. Its like taking your piece of pizza and cutting it into 50 tiny slices. You still have the same amount of pizza, just in more pieces.