Hundred-Dollar Stocks Double as U.S. CEOs Dismiss SplitsWhitney Kisling and Alex Barinka
Stock splits are losing their allure with American executives amid one of the broadest rallies ever, sending the number of shares trading above $100 to a record and showing the rising dominance of institutions in equity markets.
Gains of 20 percent or more pushed Boeing Co. and Amgen Inc. past $100 in 2013, joining 64 companies in the Standard & Poor’s 500 Index above the threshold, twice the level in 2010, according to data compiled by Bloomberg. Ten companies have split their stock this year, compared with 42 annually since 1996, data from S&P show, helping send the average share price to $65.96 last quarter, the highest on record.
Splits have been diminishing since the bull market began as pressure eases to hold prices at levels that make it easier to amass shares. While the practice has been considered a sign of confidence in future growth, executives at companies such as Apple Inc. say it does no good for shareholders and have refrained from the action since the start of the rally.
“As retail investors become less important to the investor base, the behavioral reasons for splitting the shares are less compelling,” Ravi Dhar, a professor at the Yale School of Management who has studied financial markets, said in an Aug. 12 phone interview. “These companies didn’t want to encourage too many individual investors or day traders. They wanted to keep the price high.”
Ninety-eight S&P 500 companies have surpassed the price at which they last split, with the median stock trading 27 percent higher, according to data compiled by Bloomberg. The split price has been about $96 on average, based on data from 389 firms since 1981.
Priceline.com Inc., trading at $940, has never divided its shares. Google Inc. is the second-highest priced company in the S&P 500 at $869.81, and Apple, at $498.50, last split in 2005. MasterCard Inc. has never taken the action, even after reaching a record $654 this month.
Splits, for decades a way of enticing individuals by lowering share prices, have declined as professional investors increased their role in the U.S. equity market. Ownership of stocks by institutions rose to about 67 percent in 2010 from 34 percent in 1980, according to a study by Marshall Blume and Donald Keim at the Wharton School at the University of Pennsylvania.
Those figures exclude exchange-traded funds, securities that track equity indexes and trade like shares throughout the day. The ETF industry has seen assets invested in stocks expand 56 percent since 2010 to $1.17 trillion, based on data from the Washington-based Investment Company Institute through June 30.
“If a lot of the equities are being held in some institutional intermediary, I don’t think the price is that critical,” Ernie Cecilia, the chief investment officer who helps oversee $7 billion at Bryn Mawr Trust Co. in Bryn Mawr, Pennsylvania, said in an Aug. 7 telephone interview.
Exxon Mobil Corp. reached $95.20 last month, exceeding the level from the last split more than a decade ago. International Business Machines Corp. hasn’t done it since 1999, after its stock reached $246. In 1997, the Armonk, New York-based company split two-for-one when the shares hit $179.25. IBM traded at $187.53 yesterday.
Splits “do nothing” for shareholders, Apple Chief Executive Officer Tim Cook said in February 2012, in response to an investor question. Cupertino, California-based Apple became the world’s largest company in January 2012, and its stock rallied to a record $702.10 by September 2012, bringing the market value to more than $650 billion.
“Retail investors in general don’t really understand that it doesn’t really matter if a stock has been split,” Brett Bartman, a Beverly Hills, California-based senior vice president -- financial adviser at RBC Capital Markets, said in a telephone interview. His firm oversees $1.2 billion. “They seem to still view a stock that trades at $5 or $10 as being a cheaper stock than a stock trading like Apple, which is not the case at all.”
Investors are increasingly surrendering stock selection to fund managers and ETFs. More than $38 billion went into U.S. ETFs last month, the fourth-highest inflow ever, as the S&P 500 climbed to a record, according to data since 2000 compiled by Bloomberg. Almost $30 billion of the deposits went to funds that buy and sell American equities.
“If I want immediate and broad exposure to a sector, the ETF lets us get in there immediately and get it done,” Richard Saperstein, a managing director and principal who helps oversee about $8 billion at HighTower Advisors LLC’s Treasury Partners in New York, said in an Aug. 1 phone interview.
Concern about future economic growth and memories of the 2008 financial crisis and volatility in 2011, when equity swings approached records, may be keeping executives from reducing share prices, according to Eric Teal, who helps oversee $5 billion as the chief investment officer at First Citizens BancShares Inc.
“There’s been so much volatility, managements have been hesitant to split their stocks,” Teal said in a telephone interview from Raleigh, North Carolina. “They’re unsure if an economic downturn could follow or more global uncertainty could unfold, so they don’t want to do splits right now.”
Stocks that split shares since 2011 have performed about the same as the S&P 500 during the three months since the action, according to data compiled by Bloomberg. The median company rose 6 percent, compared with a 4.5 percent gain for the benchmark gauge.
Salesforce.com Inc., the largest maker of online customer-management software, rose 2.1 percent in the three months since the April 18 four-for-one split, compared to a 9.6 percent S&P 500 rally. Whole Foods Market Inc., the largest natural-goods grocer in the U.S., added 2.7 percent since distributing one share for each owned on May 30. The S&P 500 is up 1.9 percent since then.
Cabot Oil & Gas Corp., based in Houston, was the 10th company to split shares this year when it divided the $74.78 stock in two today.
The advance that began in March 2009 is lifting more companies than past rallies, contributing to the increase in stocks trading above $100. A version of the S&P 500 that strips out biases related to market value has gained 220 percent during that stretch, compared with 149 percent in the weighted gauge. The index fell 1 percent to 1,669.02 at 9:44 a.m. New York time today.
Previous bull markets were narrower, with gains confined to fewer stocks. In the last 50 months of the 1990s technology bubble, the S&P 500 increased 146 percent, almost double the increase in the Equal-Weighted Index, as computer companies such as Microsoft Corp. and Cisco Systems Inc. monopolized the rally.
In isolation, fewer splits and record prices reduce equity market volume by lowering the number of shares that can be bought and sold for the same amount of money. About 5.67 billion shares of U.S. equities traded hands each day on all U.S. exchanges since June 30, compared to 6.03 billion in the same period last year. At the same time, the value of traded shares climbed to $203 billion a day from $190 billion.
Lower prices attract so-called high-frequency traders who buy and sell hundreds of shares in fractions of a second, attempting to profit from the price disparities. For companies that trade above $100, an average of 1.7 million shares changed hands daily, according to three-month data compiled by Bloomberg. The volume for stocks less than $25 was 11.5 million.
Citigroup Inc. reverse split its stock in May 2011, turning 10 shares into one and bringing the price above $40. CEO Vikram Pandit said part of the reason 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.”
Volume for Priceline.com dropped 23 percent since the shares crossed $600 on Feb. 28, 2012, compared with the prior 12 months, according to data compiled by Bloomberg. The Norwalk, Connecticut-based travel reservation system is the highest-priced stock in the S&P 500. Regeneron Pharmaceuticals Inc., the Tarrytown, New York-based drug maker, closed at more than $100 a share in early 2012. Trading has averaged 925,000 shares a day since then, down from 1.2 million the year before.
Companies that avoid splits even when prices soar attract “high-quality” investors and encourage them to think like owners instead of traders, billionaire Warren Buffett said in a 1984 letter to Berkshire Hathaway shareholders. The Omaha, Nebraska-based company’s Class A shares traded above $174,000 yesterday. Class B shares were $116.57 after splitting 50-for-1 in 2010.
“Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers,” he wrote. “People who buy for non-value reasons are likely to sell for non-value reasons.”
Of companies trading above their last split price, consumer discretionary shares account for the largest group at 24 percent, Bloomberg data show. Industrials and health-care providers are the second- and third-most represented industries.
“There’s a certain cachet to having high-priced stocks,” John Workman, chief investment strategist at Convergent Wealth Advisors, said in an Aug. 2 phone interview. His firm has more than $10 billion under advisement for clients. “Any of these ones that have high stock prices, the dollars being invested in these companies are so institutionalized.”