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35+ years as a private investor, college finance/economics adjunct lecturer, corporate project engineer and business development strategist, individual and small business tax preparation. Corporate experience in communications and energy BS Mechanical Engineering - Carnegie Mellon University MBA... More
  • Stock Splits Are Out Of Favor 0 comments
    Sep 17, 2013 6:30 PM

    There seems to be a trend in the market for companies not to split their common stock any more. Warren Buffet has never split his stock, now selling for some $173,000 per share. But he is and was a maverick. If you look at the pricing of stocks over the long term you will see that most companies employed stock splits to keep their common stock between $40 and $70 so that the average retail stockholder could afford to buy a block of their shares.

    Not so these days. Google, Apple, IBM, CELG, REGN, BIIB and a host of others are letting their stock prices ride without interruption. Treasurers do not have to issue more paper and accountants do not have to adjust all the ratios and financial reports they publish due to splits and stock dividends.. That is not to say their jobs have become any easier since "pay for performance" demands from shareholders increasingly call for executives and employees to receive stock and stock options as part of their compensation packages.

    Why is this happening? Institutions do not have to be concerned with stock prices in the absolute sense. They have the resources to acquire shares at almost any price, even Berkshire Hathaway's. The retail investor, though, with limited investment dollars has to resort to buying odd lots when prices get to the rich triple digits. Fortunately, most transactions now are computer based and in decimals, not fractions, as they once were.

    It is also easier for the options markets where splits could reek havoc with different issues of striking prices before and after splits.

    Commissions on stock transactions at some firms were once based on shares traded but, with the advent of real time pricing and trading via the internet, those brokerage fees have disappeared. Discount or more aptly, flat rate trading has forced most brokers to dispense with trades based on transaction value but some of the wealth advisers still maintain those fees as well as fees based on percentage of account value or market capitalization.

    A most recent effect of stock pricing surfaced last week when VISA, NIKE and Goldman Sachs were chosen by Dow Jones to replace much lower priced Hewlett Packard, Bank of America and Alcoa Aluminum in the Industrial Average. V and GS are both triple digit stocks and since the Dow Jones Industrials are price weighted, the replacements will have much larger effects on the DJIA than their predecessors. AAPL and GOOG were likely passed over for the same reason, because their nosebleed like stock levels might become too dominant compared to the rest of the Dow Jones 30 Industrials.

    Stock splits were once viewed as celebrations of stock performance, signaling recent rapid growth of a high flying company's earnings and revenues. The presumption was the acceleration would continue, even though fundamentally the owner's two halves were still equivalent to one whole share of market cap.

    For now anyway the BOD's have shelved those trophies of achievement, letting the numbers speak for themselves.

    Disclosure: I am long CELG.

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