Stock Splits’ Exit Sends Average S&P 500 Price to Record
Stock splits, enticements to investors in bull markets for decades, have been pushed to the brink of extinction by chief executive officers still recovering from the 2008 financial crisis.
Four companies in the Standard & Poor’s 500 Index (SPX) split their shares this year and 16 did in 2011, down from an average of 35 from 2004 through 2007 and a fraction of the 102 in 1997, data compiled by S&P and Bloomberg show. The disappearance of splits less than five years after stocks began their biggest plunge since the Great Depression underscores changing behavior by CEOs as well as individuals who haven’t returned to equities.
“There’s a reluctance to split a stock after such a decline is still fresh in the collective memory of management,” said Doug Ramsey, the Minneapolis-based director of research at Leuthold Group LLC, which oversees about $3.5 billion. “A stock split is just an accounting mechanism, but the psychology behind it is, you’re not going to do it unless you’re confident you’re going to trade at an elevated level.”
While the bull market that began in March 2009 has restored more than $8 trillion to American stock values and pushed the S&P 500 within 15 percent of a record high, the lack of splits helped send the average price of shares in the S&P 500 to a record $58.52 apiece on April 30, more than two decades of data compiled by Bloomberg show. That’s 9.1 percent higher than when the index reached its all-time high of 1,565.15 in October 2007 and 31 percent above the index peak in 2000.
Splits, designed to attract investors by making stocks more affordable through the issuance of extra shares, are evaporating along with equity volume.
Trading on all U.S. exchanges fell to 6.73 billion shares a day this year from 9.99 billion in the second half of 2008, data compiled by Bloomberg show. Higher prices reduce volume by creating psychological barriers for investors who weigh purchases in increments of dollars, according to TD Ameritrade Holding Corp.
Both have proven painful to investment banks and exchanges and reduced profit opportunities for newer entrants such as high-frequency traders. Revenue from equity sales and trading for the 14 biggest securities firms tracked by Bloomberg fell 36 percent since 2007 to $48 billion last year.
First-quarter net income at NYSE Euronext (NYX), the biggest American stock market operator, decreased 44 percent as U.S. stock trading tumbled 23 percent from a year ago. Nasdaq OMX Group Inc. (NDAQ), the second-largest U.S. equity exchange owner, missed analyst estimates for profit during the first three months of the year.
About 20 percent of S&P 500 companies split stock in 1997, S&P data show. On average, 12 have done so each year since 2009, after an 18-month recession spurred by more than $1 trillion of bank losses and writedowns tied to subprime mortgages. With the S&P 500 up 102 percent since the 12-year low in March 2009, the effect has been to push 47 stocks above $100 a share, a record, according to Bloomberg data going back to 1990.
Apple Inc. (AAPL), which hasn’t split since 2005, is up 41 percent this year to $569.48, crossing $600 for the first time in March. The gains boosted its market capitalization by more than $250 billion in the four months through April 9, more than International Business Machines Corp.’s entire value, data compiled by Bloomberg show. The Cupertino, California-based company’s total market value is $532.5 billion.
Priceline.com Inc. (PCLN), which converted six shares into one in 2003 as its stock hovered around $2, trades for $737.65, the highest price in the S&P 500. The Norwalk, Connecticut-based travel reservation system remains 24 percent below its Internet bubble peak of $974.25, adjusted for the reverse split.
Chipotle Mexican Grill Inc. (CMG), with the sixth-highest price in the S&P 500, has never split its stock in the six years since it became a standalone company, data compiled by Bloomberg show. The Denver-based restaurant operator reached an all-time high of $440.40 on April 13 and gained 21 percent in 2012, more than twice the S&P 500.
“Splitting is nothing more than window dressing,” Chris Arnold, a spokesman for Chipotle, said in an April 30 phone interview. “It doesn’t change or add value for anybody, not customers, not the company and not shareholders. Doing these things to manipulate the price in a way that doesn’t create value just to make it accessible to a few more people is really unimportant to us.”
McDonald’s Corp. (MCD), which spun off Chipotle in 2006, split shares for the 12th time in 1999, with then-CEO Jack Greenberg citing the company’s “desire to continue to position McDonald’s as an attractive investment for individual investors -- customers, employees, franchisees and suppliers.” McDonald’s split five times in the 1980s, never letting the stock climb higher than $106.88.
Companies that avoid splits even when prices soar encourage investors to think like owners instead of traders, says billionaire investor Warren Buffett, whose Berkshire Hathaway Inc. (BRK/A) Class A shares trade above $120,000. Even he conceded to investor demand for lower-priced stock by adding Class B shares that were worth about 1/30th the equity value when introduced in May 1996. He split those 50-for-1 in 2010 to facilitate the takeover of Burlington Northern Santa Fe. They gained 8.1 percent to $82.47 this year.
Higher prices make the market less welcoming for individuals after they were battered by two bear markets in the last decade and one of the most volatile years on record in 2011, said Christopher Nagy, managing director for order routing, sales and strategy at online brokerage TD Ameritrade.
‘Real Big Issue’
“This is starting to be a real big issue for retail investors,” Nagy, based in Omaha, said in a phone interview. “There’s this phenomenon going on where there’s hardly any trades in the marketplace, volume is at 10-year lows, and a lot of that can be attributed right back to share pricing.”
Trading at discount brokerages has slowed since the financial crisis, according to data on E*Trade Financial Corp. (ETFC) and TD Ameritrade compiled by Barclays Plc. At 537,636 transactions per day in March, volume was 15 percent below a high in October 2008. Charles Schwab Corp. wasn’t included because it changed to quarterly reporting of daily trades from monthly in 2010.
Instead of creating stock to bring prices down, four companies in the S&P 500 combined shares in 2011, the most in data going back to the mid-1990s. Consolidations by Citigroup Inc. (C) last year and American International Group Inc. (AIG) in 2009, aimed in part at frustrating strategies used by so-called high- frequency traders, have reduced market volume. Citigroup’s reverse split alone accounted for about 6.1 percent of lost U.S. volume in the last eight months of 2011, compared with 2010, according to Rosenblatt Securities Inc.
Daily trading in New York-based Citigroup has shrunk more than the 90 percent reduction that would naturally occur after a 1-for-10 reverse split, data compiled by Bloomberg show. CEO Vikram Pandit said last month part of the reason for the change was to “encourage institutional and other long-only buyers of the stock to invest in our company and also to discourage high- frequency trading that fuels volatility.”
The stock traded at an average price of about $54 in the second half of the 1990s and split four times, twice at about $60 and the other two times when it topped $70, according to data that hasn’t been adjusted for the splits.
When Google (GOOG) Inc. announced its split last month, it wasn’t to appease stockholders. Instead, the company said it created a class of nonvoting shares to exchange for options owned by employees, so that redemptions wouldn’t dilute the control of its top executives. After issuing the new stock, shares of the Mountain View, California-based search engine operator will be cut in half from more than $600.
The board of Coca-Cola Co. (KO), the world’s largest soft-drink maker, recommended splitting the company’s stock 2-for-1 last month. The issuance “reflects our desire to share value with an ever-growing number of people and organizations around the world,” said Muhtar Kent, the company’s CEO.
The lack of splits coincides with the rise of exchange- traded funds, which don’t care about the price of the shares they buy, said Jim Russell, the Cincinnati-based chief equity strategist at U.S. Bank Wealth Management, which oversees about $116 billion.
Investors have put $56.1 billion into ETFs in the last 3 1/2 years, according to Cambridge, Massachusetts-based EPFR Global, a market research firm. Still, that’s just one-fifth of the $273.1 billion they have pulled out of equity mutual funds over the same period, data through April 25 show.
“The market has turned more institutional,” Russell said in a phone interview on April 26. “As more companies are less concerned about stock splits and stock splits are a natural volume creator, you could see the trend in volume continuing to be sloppy.”
Volume has been swayed in the last decade by the rise of computerized strategies for market making and arbitrage cumulatively known as high-frequency trading. Those techniques are part of transactions accounting for as much as 53 percent of the shares that change hands daily on U.S. markets, according to New York-based research company Tabb Group LLC.
Rising share prices can create the impression volume is declining even when investors are spending about the same on equities. While volume on all U.S. exchanges has slumped 38 percent between the first half of 2009 and this year, the value of shares traded is down only 4 percent, according to data compiled by Bloomberg.
‘A Dollar Invested’
“A dollar invested is a dollar invested, I don’t care if it’s a $100 stock or a $1,000 stock,” Michael Gibbs, Memphis, Tennessee-based co-head of the equity advisory group at Raymond James & Associates Inc., said in a telephone interview on April 26. His firm oversees about $372 billion in client assets. “A lot of retail investors don’t take that approach,” he said.
“But I don’t think that just because stocks are not being split or they are too expensive would keep investors out of the market,” Gibbs said. “It might push them to other stocks. The reason they’re not in the market is the decade they suffered.”
More than $6 trillion was added to American equities from September 2003 to the market peak in October 2007, data compiled by Bloomberg show. While the S&P 500 has posted a bigger gain since March 2009, the index’s value remains almost $3 trillion less than at the 2007 high.
“Higher prices do affect volume, but I believe that the lower volume is more reflective of the continuing uncertainty in the marketplace,” Steven Listor, the New York-based head of equity trading at BNY Mellon Wealth Management, which oversees about $168 billion, said in a phone interview. “I don’t see the institutional investor community clamoring for stock splits.”
Even when investors aren’t spooked by high share prices, the trades they carry out in companies such as Google may not be counted because of rules on so-called odd lots, or trades of fewer than 100 shares. Such transactions aren’t reported in official volume or compiled in the Trade and Quote Database, or TAQ, maintained by the largest exchanges.
While that mattered little when odd lots accounted for less than 1 percent of New York Stock Exchange volume in the 1990s, it distorts tallies now, according to a July 2011 study by researchers at Cornell University in Ithaca, New York, and the University of Illinois, Urbana-Champaign.
“The emergence of high-priced stocks such as Google, where trading a round-lot requires an investment of $50,000 or more, has resulted in odd-lots constituting a significant fraction of trades for a subset of important stocks in the market,” wrote Maureen O’Hara of Cornell and Chen Yao and Mao Ye of Illinois in a paper titled “What’s Not There: The Odd-Lot Bias in TAQ Data.” Round lots are even 100-share transactions that get reported.
The number of odd-lot trades has been increasing since 2008, when the data for the study began. About 4 percent of volume in 2009 went uncounted because it was done in lots of fewer than 100 shares, up from 2.3 percent in 2008. The amount was 4.9 percent in the first 11 months of 2011, according to Yao. Computerized trading that breaks orders up into smaller pieces is the main reason for the increase, Ye said.
Measures such as those taken by Citigroup to fend off high- frequency traders and the winding down of a period when electronic firms were experimenting with strategies may also be damping volume, according to Justin Schack, managing director for market structure analysis at Rosenblatt Securities.
“From about 1997-2009, there were a lot of structural factors that drove volumes higher, a huge market structure transformation,” he said. “All these things inflated volumes and now all of those drivers have played out or reversed, the market structure transformation is largely done.”
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