Are you too good for us, Larry? Do we not have enough money for you, Prem? And Warren: drop that folksy shtick – you’re all about the big bucks.
We’re talking about the companies that stubbornly eschew the splitting of their shares, instead watching as their prices rise to ever-higher levels. Like, say, Google Inc., where CEO Larry Page watched the stock cross the $800 mark this week. Or Prem Watsa’s Fairfax Financial Holdings Ltd., which trades around $400. And, most famously, Warren Buffett’s Berkshire Hathaway Inc., which would trade only at $150,000 per share today if he had his druthers.
Companies like these are part of an odd, distinct minority; there are more than 5,000 companies on major U.S. exchanges; just 19 have had a price consistently above $250 for the last 200 trading days, per Standard & Poor’s CapitalIQ. (In Canada, just Fairfax and E-L Financial Corp., out of 1,500+ public companies, meet that criterion.)
These high sticker prices serve to make the shares seem platinum-plated. After all, you could buy 40 shares of Yahoo! stock with the money it takes to buy one share of Google.
Of course, the nominal price of a share is no indication of whether a stock is truly expensive; for that, we need to compare the price to its earnings. A $100 stock that produces $10 of earnings a year (P/E of 10) is cheaper than a $10 stock that produces only 25 cents of profits (P/E of 40).
That math prompts many to say splits “accomplish nothing,” since the economic fundamentals of the shares don’t change.
But that’s not true. Making the share price lower is an invitation to retail investors to buy, since a lower price means the opportunity to buy more shares, even if the fundamentals are the same.
Let’s take Mr. Buffett’s Berkshire Hathaway as an example. The stock was trading in the $30,000 range in 1996 when he grudgingly created a class of “B” shares in the company to head off an entrepreneur who planned to sell a financial product for the small investor that tracked the performance of Berkshire Hathaway stock. (This is the ultimate market-based signal that you’ve closed off your shares to retail investors.)
The “Baby Bs,” as they were called, were not cheap; they were trading more than $3,000 apiece in late 2009 when Berkshire agreed to buy the Burlington Northern railroad. The railroad’s board, to its credit, insisted that if its shareholders were to be paid in shares, they needed a more accessible share price.
So the Bs underwent a 50-to-1 split in January 2010. And, what do you know? Now that investors could buy in more easily, the shares quickly went to $80 apiece, from a (split-adjusted) $65 before.
Now, a disclosure: I took advantage of this, plopping more than $30,000 into 10 shares in January 2010 and getting 500 after the split. I have since sold 400 of the 500. The only way I could execute this plan, however, was to concentrate a completely inappropriate amount of my retirement money into one stock, because its sticker price was so high.
Berkshire Hathaway is an extreme example, but the effect weighs on other shares. At $800, how much Google can an individual investor buy? If you decided you wanted to put 5 per cent of a $100,000 portfolio into Google you could buy … six shares. It’s a psychological discouragement.
Which may be what these companies want; we’re a serious stock for serious investors, they say; we don’t want the rabble getting in and holding us for all the wrong reasons.
Which is completely wrong. These days, the big money that can afford shares at any sticker price is also the fickle money, whipsawing stocks through high-frequency trading and other fast-money schemes. The individual investor is the more likely loyal one.
If these companies don’t want to price their shares for individuals, though, they should consider getting off the public markets altogether.
Readers: Do you agree? Tell us what you think in our Comments section.
|Company Name||200 Day Moving Average [Latest] ($USD, Historical rate)|
|Berkshire Hathaway Inc.||130,967.9|
|NTT DOCOMO, Inc.||1,568.7|
|Intuitive Surgical, Inc.||525.5|
|White Mountains Insurance Group, Ltd.||523.9|
|E-L Financial Corp. Ltd.||417.8|
|Fairfax Financial Holdings Limited||376.0|
|Biglari Holdings Inc.||374.8|
|The Washington Post Company||359.9|
|Chipotle Mexican Grill, Inc.||321.8|
Source: S&P Capital IQ