by DAVID NOVAK
One of the questions we often get is why companies don’t offer stock splits anymore. Years ago, it would have been unheard of for a stock to be priced in the hundreds of dollars for a single share, let alone the thousands.
And it’s not just technology stocks like Amazon or Netflix. Even Berkshire Hathaway, headed by perhaps the greatest investor of all-time, Warren Buffett, is in this category—its class A shares trade at more than $300,000 per share as of this writing.
Before considering if stock splits are a thing of the past, let’s discuss why they have historically been used.
One reason is that splitting stocks will increase the available pool of buyers – the expectation being that expanding the shareholder base will make the stock less volatile over time. Another reason is to increase stock liquidity by lowering the spread
between the bid and the ask price. Also, companies argue that splits make their stock more affordable to employees and, that the act of splitting stocks shows confidence that their share price will continue to go higher.
While the favorable view on stock splits was long accepted, over the last couple decades things have changed. In 1997, 102 companies in the Standard & Poor’s 500 index split their stock; so far this year, only three companies have. Twenty years ago, there were
only six stocks that traded over $125/ share in the S&P 500; today there are 139 stocks that do.
What happened? Why don’t companies want to split their shares anymore?
There are several reasons, probably the best being that today most trading is done by institutions, rather than individual investors. These institutional buyers are largely
indifferent to the dollar price of a stock and in many ways prefer a higher price,
which effectively makes trading more exclusive, and crowds out the smaller retail investor.
Additionally, a high stock price is a natural deterrent to day-trading. There are just not that many investors interested in or able to buy and sell a stock like Apple ($215/share) or
Boeing ($358/share) multiple times throughout the trading day in an attempt to make a quick profit. And from the company’s perspective, less day-trading in their stock means less
volatility in the stock price.
While stock splits may not be completely dead, they certainly seem to be largely a thing of the past. And it doesn’t appear they’re coming back anytime soon.
David Novak, CFP® is a Certified Financial Planner™ at Novak & Powell Financial Services in Pinellas County.
Please note: he is not an attorney and this article
should not be construed as one offering legal advice.
For information about investment decisions and
financial planning, contact him at (727) 451-3440.