Over the past two years, there has been no better investment trend than the rise of artificial intelligence (AI). But in 2024, stock split euphoria has played a very close second fiddle.
A stock split is a tool that listed companies have at their disposal that allows them to superficially adjust their share price and the number of shares outstanding by the same factor. Splits are superficial in the sense that changing the share price and share count of a company of the same size does not affect its market capitalization or operating performance.
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Stock splits come in two varieties, with investors undoubtedly being more attracted to one than the other.
At one end of the spectrum are reverse splits, which are intended to increase the share price of a publicly traded company, often with the aim of ensuring that the company continues to meet the minimum standards for continued listing of a major stock exchange. Investors typically avoid these types of splits because they are usually done by struggling/underperforming companies.
By comparison, investors are lining up to buy shares of companies that conduct forward splits. A forward stock split lowers a company’s high-flying share price to make it more nominally affordable for ordinary investors who don’t have access to buying fractional shares from their broker. This is the kind of split carried out by companies that innovate better and outsmart the competition.
Since Walmart Stock split mania began in late February, more than a dozen branded companies have followed in its footsteps – and Wall Street’s most successful billionaire money managers have taken notice.
But perhaps the biggest surprise of all is that one of the hottest buys for billionaire money managers has been Wall Street’s most prominent reverse stock split of 2024.
Despite their different investment strategies, Berkshire HathawayWarren Buffett of Millennium Management, Israel Englander of Millennium Management, and Steven Cohen of Point72 Asset Management are all highly successful billionaire money managers. But they all share one common link in their respective portfolios: satellite radio operator stocks Sirius XM Holdings(NASDAQ: SIRI).
In December 2023, Sirius XM announced plans to merge its common stock with that of Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group. Although Liberty Media had a greater than 80% stake in Sirius XM, the three classes of Sirius XM tracking stock have never been particularly successful at matching the returns of Sirius XM stock. Not to mention that having so many share classes was confusing for retail investors.
After the close of business on September 9, Sirius XM’s common stock and the three share classes of Liberty Sirius This merger eliminated any arbitrage opportunity that existed between Sirius XM common stock and Liberty Sirius XM Group stock.
Equally important, Sirius What made this split unique is that, unlike most reverse splits, Sirius XM’s stock was in no danger of being delisted from a major exchange.
The purpose of this reverse split was to increase the company’s stock price from the low to mid single digits, where it had spent the past decade, to a level that would attract interest from asset managers who sometimes sell stocks priced below $5 trafficked, avoid. per share. Moving from the mid-$2s to the mid-$20s certainly accomplishes this task.
Warren Buffett, CEO of Berkshire Hathaway, is an avid buyer of Sirius XM stock. Image source: The Motley Fool.
Based on 13F filings for the quarter ending in June, Warren Buffett’s Berkshire Hathaway piled into shares of Sirius XM and two separate classes of Liberty Sirius XM Group. Meanwhile, Englander’s Millennium Management and Cohen’s Point72 Asset Management scooped up 1,698,711 shares and 454,360 shares, respectively.
The reason these billionaire money managers want to own shares of Wall Street’s hottest reverse stock split is because of its clearly defined competitive advantages, as well as its historically cheap valuation.
Although Sirius XM continually battles for listeners with traditional and online radio providers, it is the only licensed satellite radio operator. By maintaining this unique distinction, the company has excellent pricing power on its subscriptions.
However, an even more important differentiator for Sirius XM is the way it generates revenue. Traditional radio operators rely almost exclusively on advertising revenue to keep the lights on. While long periods of economic expansion are good for advertising-driven business models, terrestrial and online radio providers can struggle during recessions.
By comparison, Sirius A primarily subscription-based model leads to more consistent operating cash flow in any economic climate. Should a recession occur, Sirius XM will be much better positioned than traditional radio operators to navigate it.
Investors also get a level of predictability on the cost side with Sirius XM that simply doesn’t exist with terrestrial and online radio providers. While royalty and content costs will wax and wane on a quarterly basis, Sirius In theory, this allows the company to achieve higher operating margins over time.
SIRI Dividend Yield Chart
Sirius XM’s board appears determined to continue its aggressive capital return program as well. In addition to occasional stock buybacks, the company pays out $0.27 per share in dividends every quarter, which equates to an annual yield of 4.1%. Warren Buffett is a particular fan of robust capital return programs.
The icing on the sundae for Sirius XM is its remarkably cheap rating. Shares can now be bought for around 8.5 times next year’s earnings. This is just a stone’s throw away from the lowest ever profit figures in 30 years as a publicly traded company.
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Sean Williams has positions in Sirius XM. The Motley Fool holds and recommends positions in Berkshire Hathaway and Walmart. The Motley Fool has a disclosure policy.
Billionaires Warren Buffett, Israel Englander and Steven Cohen Plunge into Wall Street’s Hottest Reverse Stock Split of 2024, originally published by The Motley Fool
