Coca-Cola (KO) announced yesterday that its board has approved a 2-for-1 stock split, issuing a new share of stock to every current shareholder for each share owned. However, this may come as a surprise for long-time Warren Buffett watchers as the Oracle of Omaha has previously expressed a significant disdain for such actions. Buffett, whose stake in the company is $15 billion, is the largest single investor in the Atlanta, GA-based beverage maker.
Why Split?
Stock splits are a basic method for changing the price of a stock in order to change its availability to investors. A stock split most often comes in the form of a 2-for-1 split, whereby the company essentially doubles the number of shares available on the market by issuing a new share to shareholders for each existing share. In doing so, the company doubles the size of the float while simultaneously cutting the price of an individual share in half. However, a company can just as easily do a 3-for-1 or 4-for-1 split, depending on where the board wants the final share price to land. Likewise, a reverse stock split increases the price of a share by performing the reverse action and turning every two shares into one.
Why do this? The price of an individual share can affect the overall performance of a stock because of the type of investor it can attract. Lower share prices make a stock more accessible to smaller, retail investors. For large, institutional investors share price matters relatively little, but Coca-Cola’s current share price of over $75 a pop could scare off small investors looking to get involved.
Buffett Typically Opposed
However, Berkshire Hathaway’s (BRK.A) Warren Buffett has long been opposed to the stock split. This should come as no surprise for those who follow his company with its share price of over $120,000. While allowing more investors access to a stock can increase its price by increasing demand, it can also leave a stock more exposed to volatility. Smaller investors may be more inclined to act irrationally where institutional buyers will most likely ride out any short term panics. In a 1984 letter, Buffett said as much, saying that stock splits encourage short-term traders rather than the sort of long-term owners he desires.
“I’m not big on stock splits,” Buffett told CNBC in an interview in 2010.
However, this makes Coca-Cola’s split all the more intriguing. Howard Buffett, Warren’s son and anointed successor, was at the board vote and voting in support. He acknowledged that he had not discussed the move with his father.
“I don’t know what he would say about this one,” he said Howard Buffett. “Every situation is different.”
Strong Earnings As Well
Lost in the news of the stock split was a good day for Coca-Cola’s earnings. The company managed a modest beat of analyst expectations as well as modest growth in revenues. Net income was up 3 percent, as earnings rose from $106 million to $109 million year-over-year for the first quarter. That meant that EPS increased from $0.31 to $0.35 and beat average analyst estimates of $0.33 as found by a FactSet poll. Revenue was also up from $1.84 billion last year to $1.89 billion this year.
