By Jack Hough
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.
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.