Stock Watch
Berkshire Stock to Rise on S&P News
The announcement that the company will be added to the Standard & Poor's 500-stock index will give the shares a bump, but they still will be cheap.
By Thomas M. Anderson, Associate Editor, Kiplinger's Personal Finance
January 27, 2010
Editor's note: This article has been updated since its original publication on Kiplinger.com on January 22, 2010 to reflect the latest developments in this story.
Look for a big pop in the price of Berkshire Hathaway’s newly slimmed-down shares when the stock opens for trading on January 27. The stock, which we recommended in early November after Berkshire, Warren Buffett’s holding company, announced that it would buy the 77% of Burlington Northern Santa Fe that it didn’t already own, will soon be added to Standard & Poor’s 500-stock index. Following S&P’s announcement on January 26, Berkshire’s Class B shares (symbol BRK-B) soared 8%, to $73.69, in after-hours trading.
The price of Berkshire’s B shares shrunk as a result of a 50-for-1 split that took effect on January 21. And that split is intimately connected to the Burlington deal, which is valued at $34 billion and is Berkshire’s largest ever.
By buying Burlington, Buffett is making a major bet on the long-term health of the U.S. economy. The $100 per share that Berkshire, a crazy quilt of operating companies and a portfolio of stocks worth $57 billion, is paying appears to be a rich price. It represents a 31% premium to Burlington’s pre-announcement price and is 20 times the $5.01 per share that the railroad earned last year (Burlington announced fourth-quarter and 2009 results on January 21).
But Burlington may be worth more under Berkshire’s umbrella than as a standalone company. A railroad is a cash-intensive business, and Berkshire can use the float on premiums collected by its various insurance businesses to improve Burlington’s returns at low cost, says Larry Coats, manager of the Oak Value fund. The deal, which requires approval from Burlington shareholders and is expected to close in February, “has improved our outlook for Berkshire,” he says.
Berkshire is using its stock to pay for 40% of the acquisition costs. Buffett has long resisted splitting Berkshire’s famously high-priced shares -- the Class A shares, which did not split, closed at $110,700 in after-hours trading on January 26—but felt he had to do so now to make it easier for Burlington investors to take stock for the deal instead of cash. “I enjoy issuing shares at Berkshire about as much as I enjoy prepping for a colonoscopy,” Buffett told CNBC recently. “We gave the minimum amount of stock we can do in this. If we had to give any more stock, we wouldn’t have done the deal.” A single Class A share is now worth 1,500 B shares.
The split doesn’t change the value of anyone’s Berkshire holdings. Nor does a split affect any of the stock’s fundamental measures of value, such as its ratio of price to book value (assets minus liabilities), a key yardstick for valuing insurance companies, a major component of Buffett’s empire.
But the split makes the shares more accessible to investors who want a piece of Buffett, and has raised Berkshire’s trading volume. The higher volume is probably the main reason that S&P finally added Berkshire to the 500 index. S&P considers a stock’s liquidity, among other things, when deciding which companies to include in its indexes. Berkshire, with a stock-market value of about $170 billion, is the largest U.S. company not in the index. S&P will formally add Berkshire to the 500 after the Burlington purchase is completed, probably in early February.
Insurance, including high-profile Geico, accounts for about one-third of Berkshire’s business. Berkshire’s other units range from Diary Queen to Fruit of the Loom to The Pampered Chef. It also controls MidAmerican Energy, a collection of electrical utilities, and Marmon Group, a manufacturing conglomerate. Berkshire’s investment portfolio includes sizable stakes in Coca-Cola, Wells Fargo and Procter & Gamble. In the third quarter of 2009, Berkshire stocked up on behemoths, increasing its stakes in Wal-Mart Stores, ExxonMobil and Nestlé, the Swiss food giant.
Although valuing Berkshire is tricky because of all its moving parts, the stock does appear to be cheap, even after the lead due to the S&P announcement. The easiest gauge is the stock’s price-to-book-value ratio. The Class B shares have traded at an average of 1.5 times book value over the past five years. The shares now trade at about 1.3 times book value.
Reader Comments (22)
Posted by: Lisa Zentz at 11/24/2009 01:58:37 PM
The railroads have a monoply on the movement of coal, our source of choice for energy in the current and mid-term future range. It's a very strategic move, and a bargain, even at 5x.
Posted by: khaled at 11/24/2009 02:41:15 PM
Unless you have less than $3,440 at hand to invest you really don't have to wait for the split, it's not like you will own more net-worth. In fact wouldn't it make perfect sense to buy as many stocks NOW at the current rate of about $3,440/stock and on the day of the split you will just have 50 times more the number of stocks you initially purchased and will benefit from the anticipated upward movement of the stock. Maybe I am missing something here. If you think so please feel free to point out the fault in my logic. Very respectfully, Khaled
Posted by: John at 11/25/2009 01:21:09 PM
Khaled: You are correct, and may save sales commision should one wish to purchase the lower priced shares.
Posted by: Annette at 11/25/2009 07:39:01 PM
Normally you're better off buying in round lots (100), so unless you have $344,000 on hand, I'd say wait for the split. (Of course, with $344K you could buy 3 Class A shares and have enough left over to pay the commission.)
Posted by: blindeye at 11/25/2009 07:45:02 PM
I agree - for those who need to watch their pennies, now would be the time to scrape together 3400 clams - Experience has always been that eventually the price per share after split almost always rises back to presplit price - at least w/ the wise choices.
Posted by: Russell at 11/26/2009 12:48:03 AM
ok someone tell me can you do the reverse : can you buy BNI now, and when the deal goes through, you own BRK-B shares? Does it work that way too?
Posted by: JustAnotherTaxpayer at 11/26/2009 11:42:13 PM
I'm no Buffet!! but I started buying up Canadian National (Railway) for the same reason a couple of years ago..... railroads are the future (as strange as that sounds)
Posted by: gorham at 11/28/2009 11:15:41 AM
I've only purchased stock one time through Sharebuilder many years ago. How do I go about buying this kind of stock? I know its a silly question to you experienced buyers.
Posted by: En_pris at 11/28/2009 05:27:08 PM
Maybe the class B shares remain cheap because many of the companies Berkshire holds pay dividends, and many companies that Berkshire owns have positive earnings , but Berkshire just absorbs these dividends and earnings and doesn't distribute them to its shareholders. I pesonally don't expect Berkshire will ever authorize dividends of its own. This is against Buffet's philosophy. So why not just create a portfolio similar to Berkshire's and collect the dividends also? What does it matter how wealthy a company is if a stockholder can never share in that wealth?
Posted by: david russial at 11/29/2009 05:52:23 AM
This is a "no-brainer". The guy (Buffet) is a genius.
Posted by: susan at 11/30/2009 09:56:39 AM
Why has Berkshire Hathaway Cl .B not done better in the market? I had the pleasure of buying it at $4,700. My brokers do not know the answer. Thanks. Susan
Posted by: Dan at 12/10/2009 12:47:49 PM
How long do you have to be a shareholder at BRK.B before the split to make sure you get the 50-1 split?
Posted by: George Smith at 01/13/2010 07:56:54 AM
Has there been a time frame announced for the Class B shares to split, 50-1 or do you know when this is to occur?? With thanks and respect, George
Posted by: A.H. Lasseigne at 01/22/2010 11:26:03 AM
How about a disclosure as to how many shares do you or your firm own?
Posted by: Bonnie Robinson at 01/22/2010 12:02:28 PM
Re: Why not just purchase Buffett's choices and build a portfolio like his? One of the biggest perks in owning BRK.A or B shares is that I don't have to pay taxes on the dividends that the stocks in its portfolio emit. Besides BRK.B, I have my own portfolio and I reinvest the dividend shares. However, when tax time rolls around, I have had to pay a 15% tax on ALL my dividends. Buffett and Munger basically pay our taxes on the dividends from KO,WMT,XOM, etc. Until we sell the BRK stock, we do not have to pay anything to the govt. It's taken care of by our dear Oracles.So, that's just my 2 cents. Best of luck.
Posted by: AL NELSON at 01/22/2010 10:07:06 PM
I BOUGHT JOHN DEERE STOCK, THIS IS MY THIRD YEAR THAT I OWN IT. SHOULD I KEEP IT OR SELL?
Posted by: David at 01/23/2010 10:43:13 AM
Since when can insurance reserves be used to run a railroad? Insurance commisioners would have a fit!
Posted by: Jay at 01/23/2010 12:19:41 PM
The lack of understanding represented in all of these posts demonstrates why most people should not be buying individual equities. If you don't understand a stock split, then you have no business making these kinds of financial decisions by yourself! The reduction in share price is directly proportional to your diluted ownership in the company, and therefore, your diluted gain from future corporate profits. There is no difference in owning 1 share at $3,440 vs. owning 50 shares at $68.80/share, except now you are lumped in with thousands of new investors, most of whom have no idea what they are doing, who will eventually drive the stock price down at some point when they panic. Buffet is a genius for sure. He lowered the stock price to attract millions (or billions)of dollars from new investors who do not know what they are doing. He will use the new capital for the aquisition, then he will buy his own stock back from all of you suckers the first time the price goes down 20% and you all panic. He is using public stupidity to finance his aquisition. Good luck following the herd! The herd is heading for the cliff! I do believe that this is a great time to be buying equities as part of a long term investment strategy, but follow a diversified financial plan, not the herd!
Posted by: David at 01/23/2010 11:15:45 PM
Dan: If you own the shares when the split occurs, you get the benefit of the 50:1 split. There is not a per-se ex-dividend period. Its not like you buy one share at $3,440 today, the split occurs tomorrow and you suddenly have one share worth $74.40, with your other $3,969.60 simply going up in smoke. If you aren't the owner of record yet because the trade hasn't settled, the person who is the owner of record technically owes you the shares. You don't see this as it is essentially invisible but your broker will make sure you receive the correct number of shares.
Posted by: 2look4 at 01/24/2010 05:01:22 PM
Stock split is as simple as you were getting a dollar bill before, (and) now you are getting 100 pennies.
Posted by: LWD at 01/24/2010 05:31:44 PM
I'm with Jay
Posted by: Jasper at 01/29/2010 10:52:55 AM
I need and appreciate points of view: I've always heard Berkshire was like a big mutual fund of companies under single directorship. But I don't see any dividend/distributions from the individual stock gains for the investors, he uses those to enhance current shares. Is the only way to profit from ownership selling the stock as it rises? Thanks.