Fewer Stock Splits, Record Share Prices
Stock splits, designed to attract investors by making stocks more affordable, have become a rarity since the 2008 financial crisis. Four companies in the Standard & Poor’s 500-stock index split their shares this year, and 16 did in 2011. That’s down from an average of 35 annually from 2004 through 2007 and a recent peak of 102 in 1997, data compiled by S&P and Bloomberg show.
When a company splits its stock, holders get one or more shares for each share they own, while the price of the stock comes down proportionately, leaving the market value of the company unchanged. Traditionally, corporate boards have favored splits when the company’s share price has risen so high that individual investors find it difficult to buy 100 shares at a time. They often aimed to do a split at a time when they were “confident” the stock would maintain its value or rise, says Doug Ramsey, chief investment officer at Leuthold Group, a money management firm. The market plunge that accompanied the financial crisis has made corporate executives cautious about splits. “There’s a reluctance to split a stock after such a decline is still fresh in the collective memory of management,” he says.
The scarcity of splits has helped send the average stock price of companies in the S&P 500 to a record $58.52 on April 30, more than two decades of data compiled by Bloomberg show. That’s 9.1 percent higher than the average price of $53.66 when the index reached its all-time high of 1,565.15 in October 2007. With the S&P 500 up 97 percent as of May 15 from its low of March 2009, the effect has been to push 48 stocks above $100 a share, a record, according to Bloomberg data going back to 1990.
Individual investors have been wary of stocks since the market plunge that accompanied the financial crisis, and higher per-share prices may be contributing to the drop in stock trading by creating psychological barriers for investors who want to purchase blocks of 100 shares. “This is starting to be a real big issue for retail investors,” says Christopher Nagy, managing director for order routing sales and strategy at online brokerage TD Ameritrade. “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 and TD Ameritrade compiled by Barclays. At 537,636 transactions per day in March, volume was 15 percent below a high in October 2008. 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.
Apple, which hasn’t split since 2005, is up 37 percent this year to $553 on May 15. In the four months through April 9, it added more than $250 billion in market value. Priceline.com trades at $662, the highest price in the S&P 500.
Chipotle Mexican Grill, with the sixth-highest price in the S&P 500, hasn’t split its stock in the six years since it became a standalone company. The restaurant operator reached an all-time high of $440 on April 13. “Splitting is nothing more than window dressing,” says Chris Arnold, a Chipotle spokesman. “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.”
When Google announced its first stock split in April, 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 search engine operator will be cut in half from more than $600.
Warren Buffett is known for his opposition to stock splits, saying that companies that avoid them even when prices soar encourage investors to think like owners instead of traders. His Berkshire Hathaway Class A shares trade above $120,000. Even Buffett bowed 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.
Not everyone believes high share prices discourage investors. “I don’t think that just because stocks are not being split or they are too expensive would keep investors out of the market,” says Michael Gibbs, co-head of the equity advisory group at Raymond James & Associates. “It might push them to other stocks. The reason they’re not in the market is the decade they suffered.”