I have a few pet peeves surrounding investing ideas often stated or quoted in the media. I recently wrote an article about one of them and mentioned this one which evokes an even stronger reaction. As questions were asked in the comment section, and speculation about why I said such a thing headed in the wrong direction at first, I thought it was appropriate to write an article on the subject.
A stock "splits" when the Board of Directors of the company decides to divide the share price and at the same time increase the number of shares by an equal factor. Often it is a 2-for-1 split, which halves the share price and doubles the number of shares, but splits can be for any number of shares. It is like exchanging currency denominations really: two $10 bills are the same as a $20 as are four $5 bills. Visa (NYSE:V), the example in the last article, did a 4-for-1 split in March, 2015. Apple (NASDAQ:AAPL) did a 7-for-1 split in June 2014.
Decades ago, when shares needed to be purchased in round, lots of 100 shares, stock splits helped more investors than they do now. With our current technology streamlining things, we can purchase any little number of shares; I recently added 33 shares of CCL Industries TSX:CCL.B (OTC:CCDBF) to the ones I already had.
I also hold far less than 100 shares of Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). With its share price of about $850, Alphabet would be out of reach for a young person just beginning their portfolio who would have to save for many years to invest in it. Ironically, MPT says it is a holding more suited to a young person with a long time horizon due to its growth characteristics and lack of dividend.
It is commonly repeated that since stocks splits do nothing to change the market cap of the company, they are useless. I always enjoy personal finance articles and listening to people discuss personal finance, but a popular personal finance fellow seems to need to mention that stock splits are useless repeatedly when I see him on BNN. It may not benefit large fund managers or individuals who have large holdings, but for a small DIY investor like me, stock splits definitely have merit.
There is often an uptick in share price surrounding a split, scoffed at as an emotional reaction by silly retail investors. This is NOT why I like stock splits, though I do not mind if the stocks I am holding have a little boost now and then. I even do not mind if these little gifts are rational or not!
The first reason I like stock splits concerns the dividend.
As a Canadian investor, I am not able to purchase fractional shares with my dividend reinvestment plan (DRIP). This means there can be larger cash amounts deposited into the account. These amounts are smaller than the cost of a share but even over the course, of a year may not be enough to justify a market purchase that has fees attached. That cash can be trapped in a registered account where no money can be added for another year. This happens all of the time in my TFSA which is full to the contribution limit and contains only three stocks; Royal Bank (NYSE:RY), TD Bank (NYSE:TD) and Manulife (NYSE:MFC). Nothing may happen to that cash until the next calendar year when a contribution can be made and the leftover cash will be reinvested with the contribution. In this example, none of these share prices are particularly high as the Canadian bank stocks have historically regularly split when their share prices are firmly over $100. So in this case not a lot of cash is waiting on the sidelines. This could be significantly more annoying, depending on which stocks are held and whether the account in question will ever have new money added to it. When a 2-for-1 stock split occurs, it is quite easy to DRIP three shares when you were forming formerly only able to DRIP one (or some multiple of that equation) leaving less orphaned money sitting around.
Anecdotal evidence that investors expect splits in Canadian bank company shares is found in the increasing number of calls to BNN's call-in stock shows Market Call and Market Call Tonight asking when CIBC (NYSE:CM) will split its shares. CM breached the $100 mark only in November firmly and with the recent rally, sits at $118.
The other reason I like stock splits regards option writing. Options can only be bought and sold in round lots of 100 shares to a contract. This is much like the requirement of old to purchase stocks in round 100 share lots. I like to write contracts that total or risk around, but not over $20,000 at a time. I regularly write in the money put option contracts on companies I want to buy or already hold. This means that a stock above about $180 is basically off my option writing list. A 5-, 8-, or 10- for 1 split would be very welcomed on a company like Alphabet.
I follow about 40 companies. A surprising amount are not particularly suited to option writing. It would be nice to have a few more possible candidates, especially in the growth-focused company arena.
Dividends and option writing are the primary reasons I appreciate stock splits. I also like that a split gives a new and younger investor the chance to buy into companies they know, can relate to which currently may be out of reach for a monthly investment. I am also not opposed to the little share price bump shares may experience either due to the chatter about the stock whether it is because of the news or investor sentiment.
Stock splits might provide no value to a large investor or portfolio manager, but it makes a difference to me.
Disclosure: I am/we are long GOOG, RY, TD, MFC, CCDBF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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