Berkshire Hathaway (BRK-A, BRK-B) has been getting more news of late since all the way back to late 2008 when it was busy taking preferred stakes at 10% interest annual rates in Goldman Sachs (GS) and General Electric (GE). The Burlington Northern Santa Fe (BNI) acquisition was the largest deal in its history, and this solidified the stance that Berkshire Hathaway is an operating company rather than an insurance giant that owns a large portfolio of stocks, bonds, preferred shares and financial derivative contracts.
Last week came the 50-for-1 stock split of the B-shares to accommodate the BNSF acquisition. That helped to clear the way for last night’s announcement that Berkshire Hathaway would replace BNSF in both the S&P 500 Index and in the S&P 100 Index. What is interesting here, beyond the S&P announcement, is whether or not Berkshire Hathaway should be considered for an index member in the Dow Jones Industrial Average. This may be the most well-known stock index in the world, but it actually has much smaller ramifications and implications than additions into the S&P 500.
Last night’s announcement from S&P came sooner than most market pundits were expecting. It was assumed that this announcement was now much more likely by most, but many felt as though the S&P announcement would come in February at the soonest.
We are still awaiting the S&P details on the sizes that will be counted because of the merger, the difference in price of the A-Shares and B-shares and because of the amount of stock held by Warren Buffett and/or his trusts. That said, the final percentage of shares and final percentage of the total market cap being counted as ‘index-eligible” because of free-float limits counted by Standard & Poor’s.
The recent change that added Visa (V) into the S&P 500 Index in December is a perfect tool to use for how this will play out, with the exception that the Berkshire Hathaway addition into the S&P is on a date to be announced rather than a mere week away as was the case for Visa. Bloomberg lists the market cap of Berkshire Hathaway as $165 billion, but that will not all get counted for index weighting. The market cap of Visa today is roughly $63.5 billion. Interestingly enough, that announcement caused almost ten times normal volume but brought on a share gain of “only” about 2.2%. Sadly, that was also the peak since that time.
Berkshire Hathaway shares were up 7% and even 8% in the after-hours reaction last night. And this morning the shares are up 4.5% at $71.10. The highest price seen in Berkshire Hathaway B-shares since the stock split took effect was $73.00.
Being added into the S&P 500 has actual solid ramifications on potentially billions of dollars worth of stock needing to be acquired. That will likely be the case here. Being added to the Dow Jones Industrial Average is more of a prestige issue. Because the number of managed funds using the DJIA as the tracking index is so much smaller than the total dollars tracking the S&P 500, the net impact of a DJIA addition might be very little.
As far as how this would come about, the Dow Jones Indexes team would have to determine which of the current 30 components needs to get booted out of the index. None of the DJIA companies is being acquired. Alcoa (AA) has the lowest share price, and therefore the lowest weighting due to the notion that the DJIA is a price-weighted index rather than a market cap or free-float adjusted market cap weighted index. But then the next two lowest-weighted stocks are General Electric (GE) around $16.20 and then Pfizer (PFE) around $19.00. Do either of those need to be booted out of the DJIA?
Still, companies almost never take offense to being included as one of the 30 DJIA components. It might just give one more feather in the cap of Warren Buffett’s illustrious career that has turned him into one of the wealthiest men in the world.