Recently the S&P 500 has had some of its component stocks exhibiting unusual price levels. Despite the index itself recently touching record highs, splits remain very restrained for the companies in it. As a result over 70 S&P 500 companies have share prices over or very near to $100. 17 of those companies were over $200. Priceline.com (PCLN) even finished a session over $1000, the first time an S&P 500 stock cleared that $1000 milestone. The average share price for all the stocks in the index last quarter was $65.96, which is a record.
While splits from the index's members have increased from the low of 1 a year that took place in 2009, and are now taking place at over 10 a year, they are still more rare than even the recessionary period and major market decline of 01-03. During the 1990's splits were so common for S&P 500 component companies you had years with 100 of them taking the action. Here are the numbers for the last dozen years:
# Of Splits
There are 3 main reasons put forth as being responsible for the decline:
- How far institutional investors have gone in supplanting retail investors, and the influence they carry. During the last 30 or so years their share of the ownership in the U.S. equity market has gone from about 1/3rd to over 2/3rd. As lower share prices have the spread between the bid and ask representing a larger percentage of the stock price than with higher share prices, and less shares having to be traded due to increased share prices, trading costs will be reduced, a welcomed effect by them.
- The rise of the usage of ETFs by retail investors. After all, if all the stocks held by an investor are in some intermediary their price level loses its importance to that investor, who instead is focused on the ETF's price.
- Hesitant managers as a result of the volatility in the markets over the last decade or so, unwilling to make a move because of uncertainty. I don't think this has nearly the impact that the first 2 examples do, however.
While in the past people have interpreted splits as a vote of confidence in the company's prospects, hindsight shows that the extremely high amount of stock splits in the late 90's, and the relatively increased amount taking place from 2004-2007 both preceded terrible periods, making any vote of confidence not particularly prescient. Instead, it was done simply because of an elevated stock price.
To be perfectly clear a stock split in no way, shape or form alters the fundamentals of a company. It also in and of itself has no effect on the market value of a company. While announcing a split does usually coincide with the stock price being given a very short-term jolt, its lack of a fundamental basis should maybe make it of interest to speculators, but not someone who considers themselves an investor.
Some commentators have even gone so far as to call companies which engage in stock splits condescending manipulators. However, there are some tangible benefits to having lower priced shares for some investors. For those who engage in options trading, it is done in blocks of 100 shares. When dealing with companies such as Mastercard (MA) with its near $700 price tag, having the necessary cash on hand could be a problem for many retail investors. This problem is being remedied by the recent creation of mini options, which allow you to trade with blocks of 10 shares instead. At this point the availability is still limited for these instruments however, and they are not available for Mastercard. This should change over time and is something to keep an eye out for in the future.
Warren Buffett, whose Berkshire Hathaway (BRK.A) (BRK.B) class a shares have famously never been split by him, insists that stock splits almost always attract an inferior group of shareholders. It's hard to disagree with his reasoning. Stock splits don't focus on business value, instead only on stock's price. By attracting a new group of shareholders who prefer the artificial psychological comfort of more shares to actual value, it would dilute the quality of the overall shareholder base. Any investors who were willing to buy for non-value reasons would of course be willing to sell for non-value reasons, leading to often neurotic price movements in the stock which do not accurately represent the fundamentals of the company.
This Paper from the Yale School of Management validates Buffett's stance. Its findings were that stock splits did have a noticeable effect on the shareholder population. Splits caused professional investors to reduce their buying of the stock while the amateurs increased their buying. As a result the stocks tended to blandly move in line with the overall market, which is bad news for anyone who hopes to outperform it.
As a side note, Berkshire's class b shares have split, but for the specific reason of helping to facilitate Berkshire's purchase of Burlington Northern Santa Fe in 2009. Their creation in 1996 was also in response to a demand for a more affordable way for retail investors to invest, but with their class a shares trading above $30,000 at the time, this is an anomaly not likely to be duplicated by any S&P 500 stock anytime soon.
Tim Cook, the current CEO of Apple (AAPL) echoed Buffett's sentiments when he recently stated that stock splits do nothing for shareholders in most cases, a stance which is a departure for a company which split its stock in both 2000 and 2005. The statement was met with some consternation from Apple investors, as the prior rumor which had been circulating which was that they planned on splitting their shares had been sending the stock higher. There are even examples of analysts admitting that while there actually isn't any rational basis for Apple to split its shares, it should be done nonetheless, if only simply to appease irrational investors. Thoughts such as this are not exactly a call to reason.
While overall stock splits might not have much of a solid basis for being undertaken by companies, the lack of them in the market can have an effect on the revenue stream of certain companies. Examples include TD Ameritrade Holding (AMTD), Charles Schwab (SCHW) and E*Trade Financial (ETFC), which generate a large portion of their revenue from trading activity. Even if the same amount of money is flowing through the transactions taking place, the lower share volume as a result of higher share prices is going to hurt their commissions. While share price of course isn't the only variable associated with trading volumes, as you also have to consider various economic concerns, it can play a large role. Consider that many people attributed Citigroup's (C) 1 for 10 reverse stock split with lowering volume in U.S. trading a full 5%.