Will investors leap at Buffett's new 'mini' Berkshire shares?
Beginning today, investors will get a chance to buy shares of Warren Buffett’s holding company, Berkshire Hathaway Inc., for the lowest dollar price ever.
That might have been incentive enough for some small investors. But Buffett may have primed the pump on Wednesday when he called Berkshire stock “undervalued” at current prices -- which helped boost the shares more than 4%.
Berkshire shareholders on Wednesday approved a 50-for-1 split of the company’s Class B stock, which closed the day at $3,476 a share, up $144. With the split, the price will open somewhere around $69 a share today on the New York Stock Exchange.
The original Berkshire Class A shares aren’t affected by the Class B split. The Class A shares closed at $104,200 each Wednesday, up $4,170.
As Buffett-watchers well know, the billionaire has long opposed the idea of stock splits. He only issued the lower-priced Class B shares in 1996 to foil investment funds that were trying to create “Berkshire look-alikes” at more accessible share prices. Buffett believed the funds could hurt the small investors they were aimed at.
This time around, Buffett agreed to split the Class B shares to fund Berkshire’s $26-billion cash-and-stock takeover deal for railroad Burlington Northern Santa Fe Corp.
What investors get if they buy Berkshire now: a diverse mix of companies, dominated by insurance (Geico, General Re) but also including electric utilities, natural gas pipelines, a manufactured-housing firm, Dairy Queen, See’s Candies, Ben Bridge jewelers and numerous other businesses.
Berkshire also controls a massive stock portfolio, including large stakes in Coca-Cola, American Express, Wells Fargo, Johnson & Johnson and Kraft Foods.
Historically, Buffett has managed Berkshire for long-term asset growth. The company pays no cash dividends.
Buffett’s magic touch as an acquirer, investor and manager has lifted Berkshire shares an average of 12.9% a year over the last two decades, compared with an 8.2% average annual total return for the Standard & Poor’s 500 index.
But like most other big-name shares, Berkshire stock remains off sharply from its record high. The Class B shares traded as high as $4,985 in December 2007, 43% above the current price.
One way to judge the relative value in Berkshire shares is to compare the stock price against the book value, or net asset value, of the underlying portfolio of companies and shareholdings.
Based on Bloomberg News data, Berkshire shares are priced at about 1.3 times the company’s book value. By contrast, the Standard & Poor’s 500 index is priced at about 2.3 times book value.
In an interview with Bloomberg on Wednesday at the shareholder meeting in Omaha, the 79-year-old Buffett called Berkshire stock “undervalued” -- an unusual departure because he typically has refrained from making judgments about the stock’s appeal.
“Berkshire’s price is often related to book value in some way that makes a fair degree of sense,” Buffett told Bloomberg. “On a historical basis, Berkshire is selling quite low relative to book value.”
He didn’t say “buy” -- but he might as well have.
-- Tom Petruno
Photo: Warren Buffett. Credit: Nati Harnik / Associated Press