June 07, 2012 at 06:00 AM EDT
Stock Splits Suddenly Getting Cold Shoulder From Wall Street
Once upon a time, Wall Street loved stock splits. Back in 1997, 102 companies in the S&P 500 did a stock split . Last year there were just 16 down from an average of 35 a year from 2004-2007. This year there have been just four as of May with four more expected by the end of July. So why has Wall Street turned a cold shoulder to stock splits? It may be because strictly speaking, shareholders gain nothing from a stock split. When a stock splits at 2-1, for instance, it simply doubles the number of shares while cutting the price in half. So an investor who holds 50 shares of Company X at $100 a share ends up with 100 shares at $50. Still, many investors see stock splits as a sign a company is doing well. In addition, the more affordable price often helps attract more retail investors, and the increase in shares improves liquidity, making the stock easier to trade. Historically, companies would consider a stock split whenever its stock price climbed over a certain level, such as $100 a share. But attitudes have changed. "Nobody is scared of a $100 stock or a Google or Apple at $600," Howard Silverblatt, senior analyst art S&P, told MSN Money . But what changed Wall Street's mind? One explanation is that many corporate executives today see a lofty stock price as a status symbol, particularly the younger CEOs of tech companies. And some company heads point to the questionable benefits of a stock split. "Splitting is nothing more than window dressing," Chris Arnold, a spokesman for Chipotle Mexican Grill (NYSE: CMG ), told Bloomberg Businessweek . Chipotle has never split its stock, which trades at about $400 share. But some analysts think sentiment against stock splits started with the collapse of the dot-com bubble in 2000 and deepened with the 2008 financial meltdown . "There's a reluctance to split a stock after such a decline is still fresh in the collective memory of management," Doug Ramsey, the Minneapolis-based director of research at Leuthold Group LLC, explained to Bloomberg . "A stock split is just an accounting mechanism, but the psychology behind it is, you're not going to do it unless you're confident you're going to trade at an elevated level." The Consequences of Fewer Stock Splits Given the mostly cosmetic nature of stock splits, you might think having fewer of them wouldn't matter. But the lack of stock splits has had several consequences. To continue reading, please click here...
Once upon a time, Wall Street loved stock splits.

Back in 1997, 102 companies in the S&P 500 did a stock split. Last year there were just 16 down from an average of 35 a year from 2004-2007.

This year there have been just four as of May with four more expected by the end of July.

So why has Wall Street turned a cold shoulder to stock splits?

It may be because strictly speaking, shareholders gain nothing from a stock split.

When a stock splits at 2-1, for instance, it simply doubles the number of shares while cutting the price in half.

So an investor who holds 50 shares of Company X at $100 a share ends up with 100 shares at $50.

Still, many investors see stock splits as a sign a company is doing well.

In addition, the more affordable price often helps attract more retail investors, and the increase in shares improves liquidity, making the stock easier to trade.

Historically, companies would consider a stock split whenever its stock price climbed over a certain level, such as $100 a share. But attitudes have changed.

"Nobody is scared of a $100 stock or a Google or Apple at $600," Howard Silverblatt, senior analyst art S&P, told MSN Money.

But what changed Wall Street's mind?

One explanation is that many corporate executives today see a lofty stock price as a status symbol, particularly the younger CEOs of tech companies. And some company heads point to the questionable benefits of a stock split.

"Splitting is nothing more than window dressing," Chris Arnold, a spokesman for Chipotle Mexican Grill (NYSE: CMG), told Bloomberg Businessweek. Chipotle has never split its stock, which trades at about $400 share.

But some analysts think sentiment against stock splits started with the collapse of the dot-com bubble in 2000 and deepened with the 2008 financial meltdown.

"There's a reluctance to split a stock after such a decline is still fresh in the collective memory of management," Doug Ramsey, the Minneapolis-based director of research at Leuthold Group LLC, explained to Bloomberg. "A stock split is just an accounting mechanism, but the psychology behind it is, you're not going to do it unless you're confident you're going to trade at an elevated level."

The Consequences of Fewer Stock Splits Given the mostly cosmetic nature of stock splits, you might think having fewer of them wouldn't matter. But the lack of stock splits has had several consequences.

The average price of an S&P 500 stock hit a record high of $58.52 a share as of April 30. According to Bloomberg, the average S&P 500 stock price is 9.1% higher than it was at the Oct. 2007 S&P peak and 31% higher than it was at the 2000 peak.

Having a higher-priced stock has kept several large and influential companies, particularly Apple Inc. (Nasdaq: AAPL) and Google Inc. (Nasdaq: GOOG), out of the Dow Jones Industrial Average.

Because it's price-weighted, such high-priced stocks would completely dominate the Dow Jones.

A much broader consequence is that the higher average prices - and to a lesser degree the lack of extra shares that a stock split produces - have contributed to a reduction in overall trading volume.

"This is starting to be a real big issue for retail investors," Christopher Nagy, managing director for order routing, sales and strategy at online brokerage TD Ameritrade, told Bloomberg. "There's this phenomenon going on where there's hardly any trades in the marketplace, volume is at 10-year lows, and a lot of that can be attributed right back to share pricing."

Daily trading volume on all U.S. exchanges has fallen dramatically just in the past few years - about 33% since 2008.

That in turn has hurt investment banks and the major stock exchanges. Since 2007 total revenue from equity trading is down 36% at the 14 largest securities firms. Profits for NYSE Euronext were down 44% in the first quarter on 23% less volume.

Stock Splits in 2012 Meanwhile, a handful of big companies still plan on stock splits this year.

The most notable is Google, which has announced a 2-for-1 split effective in July. It's notable because Google's founders, Sergey Brin and Larry Page, are splitting the stock not for any of the traditional reasons, but to get even tighter control over the company.

That's because the new Google shares will be non-voting shares. Page and Brin already control 66% of the Google vote, but want to sell some shares. The creation of new, non-voting shares ensures shareholder influence is minimized.

So much for the Google motto: "Don't Be Evil."

However, most of the companies doing stock splits this year, such as The Coca-Cola Company (NYSE: KO) and Dollar Tree Inc. (Nasdaq: DLTR), are doing it for conventional reasons, such as making their stock more affordable.

Although it's possible the persistently high stock prices will influence more companies to give stock splits another look, for now investors have to live with this trend and its effects.

"The market has turned more institutional," Jim Russell, the Cincinnati-based chief equity strategist at U.S. Bank Wealth Management, told Bloomberg. "As more companies are less concerned about stock splits and stock splits are a natural volume creator, you could see the trend in volume continuing to be sloppy."

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Tags: financial meltdown, reverse stock splits, Shareholders, stock prices, stock shares, Stock splits, Wall Street
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