The theme this week on the Retirement Quick Tips Podcast is: Understanding Stock Splits

Today, I’m talking about why companies might decide to split their stock. 

One of the best examples of why a company might want to split it’s stock is to look at Berkshire Hathaway. Warren Buffet’s company has famously never split their stock, and as of when I’m recording this episode, the stock trades at over $505,000 per share. You need half a million dollars just to buy a single share of Berkshire Hathaway. That locks out most would-be investors, because they just don’t have $505k to buy just one share. Now you could buy the cheaper class B shares which trade for a much cheaper $335/share. 

Back in 1995, at the annual Berkshire Hathaway shareholder’s meeting, Buffett acknowledged that having such a high-priced stock — at the time, it was trading around $25,000 per share — could be “anywhere from awkward to disadvantageous” for investors, But he said that the barrier to entry was intentional.

He went on to say that “We want to attract shareholders who are as investment-oriented as we can possibly obtain, with as long-term horizons,” he said. If Berkshire were to split the stock and lower its price, “we would get a shareholder base that would not have the level of sophistication and the synchronization of objectives with us that we have now.”

So Buffet has remained committed to never splitting Berkshire’s stock price, but his stance is pretty much non-existent among all other companies and their respective Boards. 

Companies like splitting their stock for a variety of reasons. The most common reason why a company will decide to split it’s stock is that it makes expensive shares cheaper to buy, like in the case of Amazon who will be doing a 20 for 1 stock split in about a month. Amazon shares have gained over 4,300% since their last split on Sept. 2, 1999, so it’s about time if they want to bring their share price back down to a more affordable level. 

Companies will often decide to split their stock after a period of strong growth and especially if there is anticipated and continued momentum which is likely to propel the stock higher post-split. Since most investors can still only buy whole shares, it provides more access to the companies stock at a lower price point. Many high-flying growth companies whose share prices have soared in recent years have also announced upcoming stock splits - Apple, Tesla, and Google among them. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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