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 have historically announced stock splits when shares rose above $100 per share. Today there are 64 companies in the S&P 500 Index with a share price of $100 or more, but only 9 companies have split their shares in 2013. 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.