Do Stock Splits Increase a Company’s Value? - Rodgers & Associates

Do Stock Splits Increase a Company’s Value?

I’m often asked if I know of any stocks about to split their shares. The investor asking the question is usually under the impression that the value of their stock holding should increase after a split. There are some who believe a stock split can poten­tially increase the value because more investors could be inter­ested in buying a stock at $50 per share instead of one trading at $100 per share. Therefore, a $100 stock splitting 2 for 1 should increase in value. I have not read any research to support this theory.

A stock split is when a company decides to increase the number of shares outstanding. The stock price is adjusted to reflect the increased number of shares, so the market capital­ization is the same after the split. A stock dividend is when a company decides to distribute stock to share­holders, rather than cash.

Companies histor­i­cally announced stock splits when shares rose above $100 per share, but stock splits rarely happen these days. Stock splits by companies in the S&P 500 faded since 2000, while those by companies in the Dow Jones Indus­trial Average are even less frequent.  Today about 41% of companies in the S&P 500 Index currently trade at a share price of $100 or more, but only 3 companies have split their shares in 2020. The lack of stock splits along with the strong stock market perfor­mance has combined to raise the average share price of companies in the S&P 500 Index to a record high.

Some analysts believe the lack of stock splits is largely due to fewer retail investors. Most insti­tu­tional investors believe stock splits do nothing for the value of the company. They also worry that lower stock prices could encourage day traders. Keeping the stock price above $100 per share may lower volatility if the day traders look elsewhere.

Keep in mind that a company with a $100 per share stock price is not neces­sarily more valuable than a company whose stock trades for $10 per share. There are many factors involved when deter­mining the value of a company and forecasting future growth.

Origi­nally published October 2013