Although artificial intelligence (AI) has been the can't-miss innovation that's powered all three of Wall Street's major stock indexes to record-closing highs, stock-split euphoria has, arguably, been just as important in 2024.
A stock split allows publicly traded companies the opportunity to superficially adjust their share price and outstanding share count by the same factor. These changes are cosmetic in the sense that they don't affect a company's market cap or its operating performance.
Splits come in two variations, with investors gravitating to one far more than the other. On one hand, there are reverse-stock splits, which are geared toward increasing a company's share price. Reverse splits are often effected to ensure a company's stock meets the continued minimum listing standards on a major exchange.
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On the other hand, forward-stock splits are used to decrease the nominal share price for a publicly traded company. Since forward splits are almost universally conducted by companies that are out-innovating and out-executing their competition, this is the type of stock split most investors flock to.
Over the last six months, 13 brand-name businesses have announced or completed stock splits, 12 of which are forward splits. However, you might be surprised to learn that the stock Warren Buffett can't stop buying for Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) -- aside from shares of his own company and oil and gas goliath Occidental Petroleum -- is the only one of the 13 that's announced a reverse split.
The Oracle of Omaha has been a big-time seller of stocks for nearly two years
Before digging into the details of the unique stock-split stock that Buffett has been buying hand over fist for Berkshire Hathaway, some context is needed.
Although the Oracle of Omaha is known for touting a long-term investment approach, and has proclaimed on multiple occasions that he wouldn't "bet against America," what he and his top investment aides do over shorter periods may not always align with what he preaches in Berkshire's annual letter to shareholders and during his company's annual meetings.
In each of the last seven quarters, Buffett and his crew have been big-time net-sellers of equity securities.
Altogether, Berkshire's brightest investment minds have sold $131.6 billion more in stocks than they've collectively purchased between Oct. 1, 2022 and June 30, 2024. With Buffett selling more than $3.8 billion worth of Bank of America shares since the third quarter began, Berkshire's investment team looks to be well on its way to making it an eighth straight quarter of net-selling activity.
While Warren Buffett has pressed the buy button on occasion, he and his team have been very selective about their purchases for nearly two years. This is what makes him piling into a popular company enacting a reverse-stock split all the more intriguing.
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Meet the legal monopoly stock-split stock Warren Buffett is piling into
Though Buffett purchased shares of seven securities during the second quarter, including opening new positions in Ulta Beauty and HEICO, it's the roughly 96.2 million additional shares of satellite-radio operator Sirius XM Holdings(NASDAQ: SIRI) that's the eye-popper. This increased Berkshire's stake in Sirius XM by 262% from the sequential quarter.
As I alluded to earlier, most reverse splits are aimed at keeping a company's shares listed on a major stock exchange. But Sirius XM is in no danger of delisting, which makes it unique among companies conducting reverse-stock splits.
By the end of the third quarter, Sirius XM should complete its merger with Liberty Media's Sirius XM tracking stock, Liberty Sirius XM Group(NASDAQ: LSXMA)(NASDAQ: LSXMB)(NASDAQ: LSXMK), which will create a single class of outstanding shares. But with Sirius XM sporting so many outstanding shares already (around 3.85 billion), its board announced a 1-for-10 reverse split that'll be conducted upon consummation of the merger. In other words, this isn't a stock split being enacted out of weakness, which is typically what's observed with reverse splits.
Aside from whatever arbitrage opportunities might exist between shares of Sirius XM and Liberty Sirius XM Group, there are quite a few competitive advantages that would make Sirius XM attractive to Warren Buffett and his top investment aides, Ted Weschler and Todd Combs.
To start with the obvious, Sirius XM is the only licensed satellite-radio operator. To be clear, this doesn't mean it's devoid of competition. Sirius XM is fighting for listeners right alongside terrestrial and online radio providers. But as the only legal monopoly for satellite-radio services, it affords the company exceptional subscription pricing power, which it uses to stay ahead of the inflationary curve.
Another key difference between Sirius XM and traditional radio operators is how the two generate revenue. Most terrestrial and online radio providers generate almost all of their sales from advertising. This approach works great until an economic contraction or recession comes along. Businesses aren't shy about paring back their marketing budgets at the first sign of trouble.
Through the first half of 2024, less than 20% of Sirius XM's revenue was traced back to ads (via Pandora). Comparatively, almost 77% of net sales came from subscriptions. There's a considerably smaller chance of subscribers cancelling their service during economic downturns than there is of businesses meaningfully reducing their ad budgets. In short, Sirius XM's cash flow tends to be far more predictable than terrestrial and online radio providers.
Sirius XM's cost structure is more predictable than its peers, too. While there are certain expenses that are going to ebb and flow on a quarterly basis, such as royalties, transmission and equipment costs tend to be relatively fixed no matter how many subscribers Sirius XM has on its platform.
The final piece of the puzzle is that Sirius XM's stock is historically cheap amid the backdrop of a very expensive stock market. Shares could easily have been scooped up during the June-ended quarter for less than 8 times forward-year earnings -- a level Sirius XM hasn't traded at in its 30 years as a public company. The cherry on top is the company's 3.7% dividend yield.
Warren Buffett always finds a way to stand out; and buying Wall Street's unique stock-split stock is one way to do it.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America and Sirius XM. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, and Ulta Beauty. The Motley Fool recommends Heico and Occidental Petroleum. The Motley Fool has a disclosure policy.
