Splits End

Wary of stoking volatility, companies are opting not to divide their shares | Retail investors don’t “understand that it doesn’t really matter if a stock has been split”

Whitney Kisling and Alex Barinka


Priceline.com, Apple, and MasterCard would seem ideal candidates for a stock split. The latter two are trading at more than $500 per share, and online travel site Priceline is flirting with $1,000, making the inveterate dot-com-era survivor the most expensive stock in the Standard & Poor’s 500-stock index.

Yet splits have lost their allure to executives even amid a four-year-plus bull market that has sent the number of stocks trading above $100 to a record. Sixty-three companies in the S&P 500 are now above that threshold, twice the level in 2010, according to data compiled by Bloomberg. Just 10 have split their stock this year, compared with an average of 48 annually since 1980.

When a stock splits 2-for-1, the price of each share is halved while the number of outstanding shares doubles. The net effect on overall market value is zero. Even so, the practice has been considered a hallmark of companies that are well-managed and have good growth prospects. During their heyday in the late 1990s, stock splits did seem to propel share prices higher. A 1996 study, by David Ikenberry of the University of Colorado, Graeme Rankine of the Thunderbird School of Global Management, and Earl Stice, then at Hong Kong University of Science and Technology, showed stocks that split 2-for-1 performed about 8 percentage points better in the next year than those that hadn’t split.

If splits have become passé, say academics, it’s partly because retail investors in the U.S. are increasingly surrendering stock selection to professionals. Ownership of stocks by institutions, including insurers and mutual funds, rose to about 67 percent in 2010, from 34 percent in 1980, according to a study by Marshall Blume and Donald Keim at the University of Pennsylvania’s Wharton School. “As retail investors become less important to the investor base, the behavioral reasons for splitting the shares are less compelling,” says Ravi Dhar, a professor at the Yale School of Management who has studied financial markets.

Ninety-eight S&P 500 companies have surpassed the price at which they last split. The split price has been about $96 on average, based on data from 389 companies since 1981. Priceline, which trades at about $940 a share, carried out a 1-for-6 reverse split in 2003 and has not readjusted its stock price since. Apple, at around $508, last split in 2005. MasterCard has never undertaken the action, even after reaching a record $654 per share this month.

In recent years evidence has eroded that splits boost prices by whetting the appetite for shares among individual investors put off by expensive stocks. Stocks that split since 2011 have performed about the same as the S&P 500 over the subsequent three months. The median gain for companies that did splits in 2012 and 2013 was 6 percent, compared with a 4.5 percent gain for the benchmark index. Shares of software maker Salesforce.com rose 2.1 percent in the three months after its 4-for-1 split on April 18, vs. a 9.6 percent advance for the S&P 500. Toothpaste maker Colgate-Palmolive declined 4.7 percent in the three months after it distributed one additional share for each owned on May 16. The index rose 0.3 percent in the same period. “Retail investors in general don’t really understand that it doesn’t really matter if a stock has been split,” says Brett Bartman, a senior vice president at RBC Capital Markets. “They seem to still view a stock that trades at $5 or $10 as being a cheaper stock than a stock trading like Apple, which is not the case at all.”

Splits “do nothing” for shareholders, Apple Chief Executive Officer Tim Cook said in response to a question from an investor last year. Apple’s stock hit a high of $702.10 in September 2012, which brought its market value to more than $650 billion — more than any other company worldwide.

Billionaire Warren Buffett isn’t a fan of stock splits either. Companies that forgo the practice even when prices soar attract “high-quality” investors and encourage them to think like owners instead of traders, wrote Buffett in a 1984 letter to Berkshire Hathaway shareholders. “People who buy for non-value reasons are likely to sell for non-value reasons,” he said. Nevertheless, the Omaha-based company split its Class B shares 50-for-1 in 2010 to carry out its cash-and-stock takeover of railroad Burlington Northern Santa Fe. Berkshire’s Class B shares trade at around $114, while its Class A shares are priced around $170,000. (Berkshire Hathaway’s A shares aren’t a component of the S&P 500.)

Stock splits can expose companies to greater volatility because lower prices attract high-frequency traders who buy and sell hundreds of shares in fractions of a second, attempting to profit from the price disparities. For companies that trade above $100 a share, an average of 1.7 million shares changed hands daily, according to three-month data compiled by Bloomberg. The volume for stocks less than $25 apiece was 11.5 million. Volume for Priceline has dropped 23 percent since the shares crossed $600 on Feb. 28, 2012, from the prior 12 months.

Managers may also shun splits for reasons of vanity. “There’s a certain cachet to having high-priced stocks,” says John Workman, chief investment strategist at Convergent Wealth Advisors.

The bottom line Just 10 companies in the S&P 500 have carried out stock splits this year, compared with an average of 48 since 1980.


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