Stock Splits: In Whose Interest?
In April 2014, the global stock markets (especially NYSE and NASDAQ) woke up to the stock split bells. What could have otherwise been routine company information has caught the attention of the business and the investing community. In what is seen as a sudden and surprising move, world’s most admired tech behemoths such as Google and Apple have either resorted to or announced stock splits. The announcements have come at a much needed hour when the stock prices of some of the Fortune 500 companies are zooming up unprecedentedly. Hence many more are expected to follow suit. This has apparently raised the eyebrows of certain quarters of analysts who wondered whether stock splits are coming back into vogue. And importantly, this has also brought into fore the most intriguing question, “What have rising stock prices got to do with stock splits?”
Though stock splits were all on the rage during 1980s and 1990s, they have almost come to a standstill with the outburst of dotcom bubble of late 90s as well as the financial crisis of 2008. Despite the fact that several companies shunned away stock splits for quite some time, Apple, Google and others have witnessed a renewed interest in stock splits. A few Indian companies too used stock splits to moderate the stock prices with mixed success. When companies split their stock, whose interests are they serving? Would they be serving short-term or long-term interests?
Vicious Cycle to Virtuous Cycle?
Historically, as stock prices move northwards, companies try to split their stocks to make them more accessible to small investors. Consequently, stock splits have gone in and out of the favor of financial world over the past three decades, drawing the attention of both fans and critics as well. According to FactSet, during 1970s, stock splits were all in rage with giants such as Coca-Cola Co., Wal-Mart Stores and International Business Machines, etc., going for stock splits.1 The number of stock splits peaked during 1980s as well, which witnessed 114 and 111 stock splits during the years 1986 and 1987 respectively.2 Nevertheless, stock market crash during the late 1987 has slashed the number of splits by 75% in the subsequent year.
In the go-go days of the tech craze and dot-com boom, stock splits were seen as a sign of strength and universal indicator of corporate prosperity. Hence, during the late 1990s, day-traders churned the market and led to a run-up of share prices of tech giants such as Yahoo, Intel, etc. This, in turn, paved the way for a new wave of stock splits which rose to 102 in 1997.......................
Growing Fervour
Though stock splits have gone out of fashion and companies seemed to be favouring high-priced stocks hitherto, the recent stock split announcements of tech
giants such as Google, Apple, etc..........
Google
One of the world’s largest internet and technology giants, Google, confirmed the proposed stock split which became effective from April 3rd 2014. News of the stock split was announced at a time when Google reported positive fourth-quarter earnings for FY 2013. Revenues surged by 17% Y-o-Y to $16.9 billion despite a long-running slump in its online ad revenue. Google earned $3.4 billion in the October- December quarter of 2013 vis-à-vis $2.9 billion during the previous year...............
Apple
After almost nine years since 2005, Apple came out with its long-awaited stock split. On April 24th 2014, the iPhone and iPad maker cheered the investors with its strong earnings report, shareholder friendly policies and last but not the least with its massive seven-forone stock split. Apple’s second-quarter profits increased to $10.2 billion from $9.5 billion a year ago and top-line also grew as well to $45.6 billion from $43.6 billion..............
Indian Companies
Though stock splits are relatively a new phenomenon in India, of late, Indian companies as well are resorting to stock splits to make their stocks more affordable to investors. Many companies such as HDFC Bank, Infosys, Siemens, Bharti Airtel, Sun Pharma, ITC, Axis Bank, Asian Paints, etc., have the history of splitting their shares.............
Assignment Questions
I. What are stock splits? What are the differences between a stock split, bonus issue and a reverse stock split?
II. Why do companies go in for stock splits? When do you think companies can go for stock splits?
III. ............
Exhibits
Exhibit I: $100 Stocks Becoming Commonplace
Exhibit II: Frequency of stock splits on the S&P 500
Exhibit III: Market Reaction to Apple Stock split Announcement
Exhibit IV: % Change in Post-split Stock Price after a Year
