Stock splits

Article Index

What Is a Stock Split?

stock split

Last week, Netflix Inc. (Nasdaq: NFLX) shareholders approved a stock split that will raise the company's share total to 5 billion. This was just 14 months after Google Inc. (Nasdaq: GOOG, GOOGL) held its own stock split in April 2014.

Whenever a major company issues new share we hear the same questions from readers: What is a stock split, and why is this company holding a stock split?

Here is the full breakdown on stock splits and why companies do them...

Apple Stock Split Opens the Door for These 7 Stocks to Follow

The Apple stock split, given the company’s outsized influence, could well inspire a fresh wave of stock splits after years of drought.

Once common, stock splits have become increasing rare over the past decade or so, as companies began to view a lofty stock price as a mark of prestige.

But the Apple stock split, along with other high-profile stock splits this year from MasterCard and Google, seems to be signaling a shift in corporate attitudes.

And at this point, there’s no shortage of high-priced stocks ripe for a split...

Stock Splits Suddenly Getting Cold Shoulder From Wall Street

Once upon a time, Wall Street loved stock splits.

Back in 1997, 102 companies in the S&P 500 did a stock split. Last year there were just 16 down from an average of 35 a year from 2004-2007.

This year there have been just four as of May with four more expected by the end of July.

So why has Wall Street turned a cold shoulder to stock splits?

It may be because strictly speaking, shareholders gain nothing from a stock split.

When a stock splits at 2-1, for instance, it simply doubles the number of shares while cutting the price in half.

So an investor who holds 50 shares of Company X at $100 a share ends up with 100 shares at $50.

Still, many investors see stock splits as a sign a company is doing well.

In addition, the more affordable price often helps attract more retail investors, and the increase in shares improves liquidity, making the stock easier to trade.

Historically, companies would consider a stock split whenever its stock price climbed over a certain level, such as $100 a share. But attitudes have changed.

"Nobody is scared of a $100 stock or a Google or Apple at $600," Howard Silverblatt, senior analyst art S&P, told MSN Money.

But what changed Wall Street's mind?

One explanation is that many corporate executives today see a lofty stock price as a status symbol, particularly the younger CEOs of tech companies. And some company heads point to the questionable benefits of a stock split.

"Splitting is nothing more than window dressing," Chris Arnold, a spokesman for Chipotle Mexican Grill (NYSE: CMG), told Bloomberg Businessweek. Chipotle has never split its stock, which trades at about $400 share.

But some analysts think sentiment against stock splits started with the collapse of the dot-com bubble in 2000 and deepened with the 2008 financial meltdown.

"There's a reluctance to split a stock after such a decline is still fresh in the collective memory of management," Doug Ramsey, the Minneapolis-based director of research at Leuthold Group LLC, explained to Bloomberg. "A stock split is just an accounting mechanism, but the psychology behind it is, you're not going to do it unless you're confident you're going to trade at an elevated level."

The Consequences of Fewer Stock Splits

Given the mostly cosmetic nature of stock splits, you might think having fewer of them wouldn't matter. But the lack of stock splits has had several consequences.

To continue reading, please click here...