Image Credit: Christophe Vorlet
By Jason Zweig | Sept. 30, 2016 2:17 pm ET
Stock splits are going extinct.
So far in 2016, only five companies in the S&P 500 stock index — and only 63 among more than 10,100 U.S. companies tracked by S&P Dow Jones Indices — have split their shares. This year is on track to be the third-lowest for stock splits in modern history, behind only 2009 and 2010, when companies were too traumatized by the financial crisis to dare lowering their share prices.
Share prices that look like typographical errors — Berkshire Hathaway’s, around $217,000; NVR, the homebuilder, around $1,640; Priceline Group, about $1,470; Alphabet, the parent of Google, over $800 — are becoming the norm. The days of giving 100 shares of stock as a confirmation or bar mitzvah or graduation gift may be doomed; you may have to give a fixed dollar amount instead.
But I am not here to lament the demise of the stock split. In fact, that is good news. It is a sign that the investing world may finally be learning the distinction between the price of a stock and the value of a business.
In a typical “two-for-one” split, a company doubles the number of its shares outstanding while halving the per-share price. That is the stock-market equivalent of exchanging one dime for two nickels. You end up holding twice as many units each worth half its former price. You’d be foolish to think that makes you richer.
Back in the days when stock tickers went clickety-clack and stockbrokers were human beings rather than websites, it was cheaper to trade in “round lots” of 100 shares than “odd lots” of less than 100.
And during the Internet bubble, companies with levitating stock prices could get another boost just by announcing a stock split, which traders erroneously regarded as a sure sign of future gains.
But today, online discount brokers such as Fidelity Investments or Charles Schwab charge commissions of less than $10 per trade regardless of how much stock you buy or what the share price happens to be.
As companies stop splitting, the average price of an S&P 500 stock, according to Credit Suisse, has risen to a near-record $86 per share — after decades of remaining in a range between $25 and $45. (Adjusted for inflation, average share prices fell by more than 90% between 1933 and 2007 — a trend that has sharply reversed since.) The average share price of companies in the small-stock Russell 2000 index, by contrast, has risen only to about $29.
Index funds, those autopilot portfolios that are run to minimize costs, own proportionately more of large stocks than small stocks. Unlike individuals, funds generally pay commissions based partly on how many shares they trade, so it is generally more expensive for funds to buy and sell a stock after it splits. These big funds, not individuals, are the investors most companies cater to nowadays.
Some still say that splitting is a signal of good health.
When Louisville, Ky.-based beverage company Brown-Forman announced a two-for-one split in May, its chief executive, Paul Varga, said the move “reflects the company’s confidence in our ability to sustainably grow our sales, earnings and cash flow over the long term.”
“There’s no compelling business case to doing it,” says Robert M. Knight Jr., chief financial officer of Omaha-based Union Pacific, which last split, two-for-one, in 2014. “It’s more of a feel, kind of a subtle message of confidence that maybe your stock is going to continue to rise.”
But even that sort of ambivalent support is dwindling.
Home Depot split its stock in eight of the 11 years from 1989 through 1999, cumulatively turning each one of its shares into more than 30. It hasn’t done a split since and has no plans to do another, says its head of investor relations, Diane Dayhoff.
A split “wouldn’t change the intrinsic value of the company and doesn’t provide any real benefit,” says Ms. Dayhoff, while administrative and registration costs would likely run into the hundreds of thousands of dollars. “We have to sell a lot of hammers to make that up,” she says.
Thomas Gayner is co-chief executive of Markel, an insurance company whose share price brushed $930 this past week. “If you and I together bought some commercial real estate for $1 million,” he asks, “would it matter whether we divided it so we each held one share at $500,000 apiece or 500 shares at $1,000 apiece?”
He adds, “we want shareholders who focus on the investment itself, rather than on the currency it’s denominated in.”
Even Mr. Gayner admits, though, that a high stock price still has a vestigial allure. If Markel goes above $1,000 per share, he says, “I’ll probably take my wife out to dinner.” Then, catching himself, he adds with a laugh: “But I won’t use Markel stock to pay for it.”
Source: The Wall Street Journal