I have nothing against a stock split. I did two in the Sixties, but this is really a non-event… It’s really paper shuffling. — Henry Singleton, CEO Teledyne
Mathematically, nothing changes with a stock split. The number of outstanding shares increase in proportion to the split, but the share price decreases in an inverse proportion.
In other words, a 2-for-1 stock split doubles the share count but halves the stock price. The market cap stays the same. So if the company was “expensive” before the split, it’s still expensive afterward. Thus, the paper shuffling.
And yet, companies still do it because they believe there’s a benefit. But why?
The latest announcement by Apple might shed some light. Its press release claims a stock split will “make the stock more accessible to a broader base of investors.”
That appears to be a popular answer. Similar responses have been used throughout history.
We have the No. 1 desktop in the country, so it only makes sense to broaden the appeal of the stock so they’re not just customers but also shareholders. — Brad Shaw, VP Gateway 1999
This decision reflects the company’s continuing desire to make our stock accessible to a broader base of investors. — Mike Brown, VP Microsoft 1994
The price of our shares has increased significantly over the past year… By taking this action, our board expects to make Disney shares accessible to a broader segment of the investing public. — Michael Eisner, CEO Disney 1986
We want to make our stock more attractive to the small investor. — Frank Cary, CEO IBM 1979
A wider distribution of Swift & Co. shares is desirable in interest of the company. This distibution can best be obtained if capital stock is represented by a larger number of shares of lower par value, making the stock more available to the smaller investor including the company’s customers and employees as well as consumers of the company’s products. — Alden Swift, President Swift & Co. 1930
While Studebaker common is fairly well distributed, the directors feel that much wider distribution among employees, dealers, car-owners and investors generally will follow splitting-up of stock… — Albert Erskine, President Studebaker 1924
Of course, “more shareholders” makes for a good excuse. On rare occasions, it might even be true. For instance, the Tribune Company did a 4,800-for-1 split in 1983, in order to go public. It only had 7,393 outstanding shares at the time.
But in most cases, a company that already has tens of millions or billions of outstanding shares, it’s not about “more shareholders.” If it were, every company would make stock splits an annual event.
Whether CEOs know it or not, stock prices influence investor behavior. And a stock split does just that to unsuspecting investors.
I’ve explained this before, but Fred C. Kelly said it better. Kelly, who wrote Why You Win or Lose: The Psychology of Speculation, tackled stock splits in 1937:
After a stock has had a wonderful advance, most people hesitate to buy it, because it looks too high. But keep it near its high mark, in a narrow range of fluctuations — with an occasional sale, higher than ever — and thousands of ordinary cautious people will begin to think all the good things they have heard about that stock must be true. It evidently isn’t too high after all.
This sentiment in times comes to permeate the whole financial community. Those who have been suspicious of the stock are held up to constant ridicule by the persistence with which it clings to higher levels.
Then stock split-ups aid to confirm the growing impression that the shares are not priced too high. Traders gladly buy a stock at $100 a share, soon after it has been split five-for-one — whereas they wouldn’t think of paying $500 a share. Even though our intelligence tells us that five shares at $100 are exactly the same as one share at $500, before the split-up, we nevertheless prefer to fool ourselves into feeling that the shares at $100 are better bargains.
Not all investors take math into account. Some investors buy stocks based on affordability, not valuation. If the price seems reasonable, they’ll buy it, regardless of valuation. Short-term thinking CEOs hope for just that — more demand pushes the stock price higher.
Stock splits are emotional triggers to entice new buyers. It’s paper shuffling to fool investors.
Sources:
The Singular Henry Singleton
Gateway Stock Split Signals Broader Competitiveness, San Diego Business Journal, August 16, 1999
IBM for All: Compute it at 4 to 1, Time, January 1, 1979
Microsoft Stock Split Approved, The Globe and Mail, April 26, 1994
Walt Disney Declares 4-for-1 Stock Split, Eight-Cent Dividend, Wall Street Journal, January 14, 1986
Swift & Co. Stock Split-Up: Pres. Swift on Benefits of Wider Distribution of Stock, Barron’s, January 20, 1930
Studebaker Plans Stock Split, Barron’s, March 3, 1924
Fooling Ourselves by Fred C. Kelly, Barron’s, March 1, 1937
Last Call
- The Times that Try Stock-Pickers’ Souls – Albert Bridge Capital
- Reasons (Not) to Be Cheerful – J. Montier
- Framing Your Investments for Context & Clarity – B. Ritholtz
- Pedal Pushers: When Bikes Became the Vehicle for a Bubble – The Lookout Investor
- How Fixed-Income Portfolios Match or Beat Stocks in the Long Run – Wharton
- Value Investing Is Short Tech Disruption – Sparkline Capital
- Maria Konnikova: Less Certainty, More Inquiry (podcast) – Knowledge Project
- Bill Gates on Covid: Most US Tests Are ‘Completely Garbage’ – Wired
- How One NBA Player Turned A $350,000 Salary Into $600M – Huddle Up
- The 100-Year History of Self-Driving Cars – OneZero
