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The Demise of the Stock Split

Stocks roared back from their 2009 lows, but companies seem less keen than ever to split their shares.

The S&P 500 index is a mere 11% climb away from the all-time high it hit in 2007. That year, 28 of its members split their shares, or about 6%, down from an average of more than 50 per year since the 1970s.

Last year there were only 15 stock splits in the S&P 500, and this year there have been just three: TJX Companies (TJX), Cabot Oil & Gas (COG) and Estee Lauder Companies (EL).

Nearly one in 10 index members now carries a stock price in triple digits. Priceline, Google, Apple, Intuitive Surgical, Mastercard and Chipotle Mexican Grill all sell for more than $400 per share. (Berkshire Hathaway remains in a league of its own, at more than $122,000 per share.)

Seasoned investors know that nominal stock prices are arbitrary things. Companies can adjust their share prices lower through stock splits and higher through reverse stock splits. A $20 stock isn’t necessarily a better deal than a $120 one. To tell whether shares of a company are a good value, investors often compare the sum price of all outstanding shares (the “market value”) with measures of company prosperity: earnings, cash flow, book value and so on.

But for decades, companies have tended to periodically reduce their share prices through stock splits. That created something researchers called the nominal share price puzzle. The price of an average share traded on the New York Stock Exchange had remained relatively constant at $35 since the Great Depression, according to a study published in 2009 in the Journal of Economic Perspectives. Inflation, which has lifted the prices of ordinary goods and services over the decades, should have raised it to $435 by now.

The average stock price has creeped up: to $78.

Companies kept their stock prices low, researchers theorized, to cater to individual investors who preferred it that way — even without an economic rationale. Brokers also tended to receive larger fees on transactions involving low-price shares, creating an incentive to recommend them.

Stock splits peaked in 1982 at 23% of U.S. companies and by 2009 had plunged to less than 1%, according to a study by Kristina Minnick, a professor at Bentley University. Ms. Minnick noted that institutions account for a higher percentage of stock ownership today, reducing the payoff for companies to cater to the tastes of individual stock buyers, and that broker incentives have changed, removing the preference for low-price shares.

Of course, companies had another reason to forego splits in 2009: an ongoing financial crisis and market crash. That companies haven’t resumed splitting their shares by now says that either they’re still wary about another market downturn, and so wish to wait a bit longer, or that investors should get used to seeing more triple-digit stock prices.

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    • I follow both US and foreign ordinaries (mostly Swiss). With the foreign ordinaries, i observed that the companies rarely split; the stock prices keep going up. I bought some odd-lot shares when it was in the high $500.00s. Now, it is hanging at $1000.00 a share. About 5 years ago, another stock’s ADRs had a ratio of .2 ordinaries equaled 1 ADR with the ADR about $200.00 an ADR or $1000.00 per ordinary. The company did a split of the ordinary and, reset the the ADR to be a 1:1 ratio with the ordinary. Somehow, I wound up with a 5 for one split by the time the math was finished. The company said it did this because North Americans were becoming the single largest shareholding group, it wanted to accommodate this and make it easier for individuals in the US to own. This was a totally different perspective from the emerging pattern as noted in the article. The pattern to higher price per share indicates that the movement of direct, individual ownership is moving to the 1%. The smaller person is being pushed to ETFs and mutual funds. Luckily, there are still companies out there that have direct purchase plans.

    • As a small investor, I am now indifferent. I can buy 10 shares of AAPL or 227 shares of XOM or 73 shares of PG, and my transaction cost is about $8 in any case. Before internet trading, transaction fees were very high and buying something in “odd lots” (not divisible by 100) could double the transaction cost. Option traders (where blocks are still 100′s) are now the only ones affected, and I don’t think that corporations are going to spend time and money to protect them. The next barrier is likely between $2000 and $5000 per share, where 1 share becomes more than what some small investors can buy. [BRK has B shares for about $80, so the high price of A shares is avoidable for the small investor; it does protect the big investors though because the A shares have disproportionately high voting rights]

    • Stock splits tend to be of benefit to the retail investor, as stocks tend to rise after the split, allowing one to sell half or at least part of the shares and take profits off the table.

    • I wonder how much of it is due to trading costs. When exchanges charge a fee of ~$0.003 / share for removing liquidity and options brokers charge per contract, a low share price is a disadvantage. While I can’t think of any good reason why it should cost nearly 20x as much to trade a given dollar value of MSFT ($32/share) than the same dollar value of AAPL ($600/share), but that’s the way the market is set up, and avoiding splits is the rational response.
      If/when stock exchanges charge a % of the trade value and tick size shrinks to the point where the B/A spread on high-volume stocks isn’t consistently one tick, I imagine the situation will change.

    • This is a big deal for options traders. A single Apple option puts you on the hook for 60k, which is too much for many people.

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