All posts by Art Dinkin

Are Stock Splits Passé?

I grew up in the 1970's and graduated High School in the early 1980's. I grew up watching Happy Days and remember wondering how the leather jackets, slicked back hair, and the poodle ever came into fashion. Meanwhile my high school yearbook is filled with pictures of kids with bright pastel outfits, huge round glasses, and girls with big hair. As a kid in the 70's the 50's seemed like ancient history but it was only 20 years before. Now I wonder what kids today think about the 1980's with an appreciation for the irony that my 30th High School reunion has already been held.

There is a reason the fashion industry releases new products every season. Our world is in motion. Fashion is evolutionary. Trends are constantly changing preferences.

There are also trends on Wall Street.

In the dot com era stock splits were common. In the 1990's it was widely believed that it was best to keep a stock price in a range of $20 – $80 per share so a round lot, 100 shares, could be purchased for $2000 – $8000.

The mechanics of a stock split are straightforward. The number of shares increases while the stock price decreases. For example suppose you own 100 shares of XYZ stock which trades at $100 per share and the stock splits 4:1. After the split you own 400 shares worth $25 each. The market value is unchanged at $10,000 total but the share price has become 'more affordable'.

Like most fashions, there was never any announcement that stock splits were no longer vogue. They simply just faded out into distant memory.

Today there are many popular stocks trading at several hundred dollars a share or more; Google (GOOG), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Wynn Resorts (WYNN), Goldman Sachs (GS), O'Reilly Automotive (ORLY) just to name a few. Of course then there are Berkshire Hathaway A shares (BRK-A) which trade for about $175,000 per share because it has never split!

The last split I could recall was Citigroup (C). In 2011, Citigroup announced a 1:10 reverse stock split. A reverse split is just the opposite of a regular split. The number of shares is reduced and the value of each share is increased. At the time, Citi was trading for three dollars and change per share. After the split, the shares were valued in the thirty dollar per share range. Since stocks that trade for less than $5 per share are considered penny stocks and in danger of being removed from some exchanges, the reverse split not only added credibility to the stock but also kept it safely on the exchanges.

I did a little research into both splits from the recent past and upcoming splits. It seems a large majority of modern splits are smaller firms which trade over-the-counter doing reverse splits to raise their stock price.

The financial fashions have changed. Moderately priced stocks are so 1990. Today it is the high priced stocks which carry the prestige.

This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities. Any securities mentioned are for illustration purposes only. All economic and performance information is historical, unless otherwise indicated, has not been verified, and not indicative of future results. There can be no assurance that the financial concepts and strategies presented in this material will be successful. Investments are subject to market fluctuation, risk, and loss of principal. Past performance is not a guarantee of future success. Every investment strategy has the potential for profit or loss.

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