Financiers Warren Buffett, Israel Englander, and Steven Cohen are accumulating investments in Wall Street's most sought-after reverse stock split of 2024.
Over the past two years, nothing has been as popular as the surge of artificial intelligence (AI). But in 2024, the excitement surrounding company stock splits has come very close second.
A stock split is a tool companies can use to adjust their share price and outstanding share count without affecting their market cap or operational performance. Splits are superficial because changing both the share price and share count by the same factor has no real impact on the company.
Stock splits come in two varieties, with investors generally favoring one over the other.
On one end of the spectrum are reverse splits, which aim to increase a company's share price, usually to meet the minimum listing standards of a major stock exchange. Investors typically avoid this type of split since it's often used by struggling or underperforming businesses.
By contrast, investors have been eager to buy shares of companies enacting forward splits. A forward stock split reduces a company's high-priced share price to make it more affordable for everyday investors, who usually cannot purchase fractional shares through their broker. This is the type of split implemented by successful and innovative companies.
Since Walmart initiated stock-split fever in late February, many well-known companies have followed suit. Even notable billionaire money managers have noticed.
Surprisingly, one of the most popular buys for billionaire investors this year has been Wall Street's most prominent reverse stock split of 2024.
Buffett, Englander, and Cohen are investing in this prominent reverse stock split
Despite their different investment strategies, Berkshire Hathaway's Warren Buffett, Millennium Management's Israel Englander, and Point72 Asset Management's Steven Cohen are all successful billionaire money managers. Yet, they all share a common investment: shares of satellite-radio operator Sirius XM Holdings (SIRI 12.15%).
In December 2023, Sirius XM announced plans to merge its common stock with Liberty Media's Sirius XM tracking stock, Liberty Sirius XM Group. Despite Liberty Media holding over 80% of Sirius XM, its various classes of tracking stock had failed to match the performance of Sirius XM shares. Furthermore, the multiple classes of shares were confusing to retail investors.
After the close of trading on Sept. 9, Sirius XM's common stock and Liberty Sirius XM Group's three classes of shares were merged, creating a single common share class, which the company referred to as "New Sirius." This merger eliminated any potential arbitrage opportunities between Sirius XM and Liberty Sirius XM Group shares.
Equally important, Sirius XM's board announced a 1-for-10 reverse stock split following the completion of its merger (also after the close of trading on Sept. 9). Unlike most reverse splits, Sirius XM's stock was not in danger of being delisted from a major stock exchange.
The purpose of this reverse split was to increase the company's share price from the low-to-mid single digits, where it had been for a decade, to a level that would attract the attention of asset managers, some of whom avoid stocks trading below $5 per share. From the mid-$2's to the mid-$20's, this was certainly achieved.
Wall Street's most-unique stock split of 2024 is historically cheap
Based on 13F filings from the June-ended quarter, Warren Buffett's Berkshire Hathaway acquired shares of Sirius XM and two separate classes of Liberty Sirius XM Group. Meanwhile, Englander's Millennium Management and Cohen's Point72 Asset Management purchased 1,698,711 split-adjusted shares and 454,360 shares, respectively.
The reason these billionaire investors want to own shares of Wall Street's most popular reverse stock split is due to its clearly defined competitive advantages and historically low valuation.
Although Sirius XM competes with traditional and online radio providers for listeners, it's the only licensed satellite-radio operator. This provides the company with strong pricing power on its subscriptions.
Moreover, Sirius XM generates sales differently than traditional radio operators. Traditional radio operators rely almost exclusively on ad revenue to survive, while lengthy economic expansions benefit ad-driven models. However, during recessions, terrestrial and online radio providers can struggle significantly.
By comparison, Sirius XM derived 20% of its net sales in the September-ended quarter from ad revenue (via Pandora) and close to 77% from subscriptions. A predominantly subscription-driven business model ensures more consistent cash flow in any economic climate. If a recession were to occur, Sirius XM would be better equipped than traditional radio operators to navigate it.
Furthermore, investors can rely on predictable costs with Sirius XM that do not exist with terrestrial and online radio providers. Although royalty and content costs fluctuate quarterly, Sirius XM's transmission and equipment expenses remain relatively constant, regardless of the number of new subscribers. This could lead to higher operational margins over time.
Sirius XM's board shows a strong commitment to carrying on its vigorous share repurchase strategy as well. Besides occasional stock purchases, they're also distributing a quarterly dividend of $0.27 per share, equating to a 4.1% yearly profit yield. Warren Buffett, notably, is a major supporter of strong capital return initiatives.
The cherry on top for Sirius XM is its incredibly affordable market value. Shares can be acquired at the moment for roughly 8.5 times their anticipated earnings for the forthcoming year. This figure is barely more than the company's all-time low forward-earnings multiple of 30 years as a publicly traded entity, which it reached with a stone's throw.
In contrast to the excitement surrounding forward stock splits, some companies opt for reverse splits to boost their share price, such as Sirius XM in 2024. This reverse split was aimed at attracting asset managers who often avoid stocks below $5 per share.
Despite the different investment strategies of Warren Buffett, Israel Englander, and Steven Cohen, they all saw value in investing in the reverse-split Sirius XM, drawn by its historically low valuation and clearly defined competitive advantages.
