Priceline-ing Out the Public

For a company built around the idea of democratizing the cost of travel, The Priceline Group (PCLN) doesn’t like democracy too much when it comes to shareholders. And it also doesn’t want to pay dividends.

Not only does it sport the second highest share price of all companies in the S&P 500 index, but at a recent cost of more than $1,400 it is nearly double the price of Alphabet (nee Google), which is next highest at a little under $800 a share.

That means one “round lot,” or 100 shares, of PCLN will set you back more than $140,000, which is a lot more than most investors can afford if they want a properly diversified portfolio. The net effect is more than 97% of Priceline’s publicly traded stock is owned by institutional investors and mutual funds, and less than 3% owned by everyone else (by way of comparison, only 73% of GOOG is owned by institutions and funds).

To be clear, Priceline is nowhere close to being the most valuable stock in the S&P 500 index. That honor goes to Apple (AAPL), which has a market capitalization (share price multiplied by number of shares outstanding) of $571 billion. Priceline’s market value of $70 billion ranks it 58th, sandwiched between U.S. Bancorp ($75 billion) and Texas Instruments ($69 billion).

In June of 2014 Apple split its stock 7-for-1 to drive its share below $100, in part to qualify for inclusion in the Dow Jones Industrial Average index the following year. But Apple also wanted to make it easier for individual investors to own its stock, which was above $600 at the time of the split. By June of 2015 Apple’s share price appreciated from $91 to more than $130, a gain of nearly 50% in only a year so it appears that strategy was successful.

By keeping its share price so high Priceline is discouraging individual investors from owning the stock, who tend to buy and sell in 100 share lots. If it wanted to, Priceline’s management team could split its stock 10-for-1 and bring its share price down below $150, putting it the same range as Apple, Home Depot and dozens of other blue chip stocks that are popular with institutions and individual investors alike.

Even legendary investor Warren Buffett’s saw fit to effectively split his mammoth Berkshire Hathaway holding company 10-for-1 by issuing “B shares”, which directly track the value of the much more expensive “A shares,” currently the most expensive stock in the index at $225,000 and change per share. As is the case in most things Buffett does, his reasons for issuing the additional shares are self serving. While he wants investors of all sizes to have access to financial acumen, he also does not want to be beholden to a small group of institutional investors second guessing his every move.

So why would Priceline prefer to remain accountable to a relatively small group of professional investors, instead of spreading its stock around a much larger (and less demanding) universe of shareholders? By keeping virtually all of its stock in the hands of a small number of institutional investors, Priceline can enjoy the primary benefit of being a publicly traded company which is the liquidity provided by public markets. Privately held stock is difficult to value since there is no market for doing so, and even more difficult to buy and sell for the same reason.

But by having so few shareholders it avoids one of the main liabilities of being public, which is having to answer to a diverse range of shareholder interests. While Berkshire Hathaway’s annual shareholder meeting is famous for the degree to which so many of Buffett’s loyal shareholders trek to Omaha to hear his words of wisdom, that same feeling of empowerment can create a hostile environment for a less capable management team that is not living up to expectations.

In the case of Priceline, there is no apparent reason why its management team would prefer to keep its performance opaque. Its share price has outperformed the S&P 500 index over the past year by a wide margin (+14.1% vs. +10.6%), while operating on a healthy 27% profit margin. Now trading at nearly 18 times forward earnings, it is priced about the same as the overall stock market so it does not appear to be precariously close to collapsing like some overpriced momentum stocks.

There is only one reason I can think of why Priceline’s management team would rather keep things status quo. The company is sitting on a huge pile of cash (more than $4 billion), yet does not share any of it with its shareholders via dividends. However, it has spent billions of dollars buying back its own stock over the past couple of years, thereby driving up its share price. That share price appreciation is not taxed until the stock is sold, and at a more favorable long-term capital gains rate when it is. The 3% of shareholders that might prefer to get some of that money now in the form of regular dividends effectively have no voice in the matter.

To be clear, there is nothing unethical about what the company is doing, but there is something about it that just doesn’t feel right to me. Since bottoming out near $50 eight years ago the stock has appreciated by 2,700% while the S&P 500 gained 125%. I think it’s time for Priceline to let some of that success travel to the pockets of the investing public that it so dearly serves.