Text size
Ina Fassbender / AFP via Getty Images
After Apple and Tesla recently announced stock splits, shares of each accounted for nearly 20%. Given those large gains, investors can expect more companies to follow high-priced stocks.
That can frustrate anyone who believes in market efficiency. Pins are not intended. They change the value of nothing fundamentally about a business. After all, if you have a stock of $ 100 and split it 5-for-1, then you have five $ 20 shares, which still add up to $ 100.
The most prominent supporter of this view has been Warren Buffett, head of Berkshire Hathaway.
Its A shares (ticker: BRK.A) were recently trading over $ 316,000. (Berkshire also has B shares [BRK.B] who change hands near $ 210.)
But many investors believe splits to do matter. To press their case, they can burn broker statements and stock cards. It is hard to argue with rapid gains of 20%.
The average share price has risen sharply. For the S&P 500 it is about $ 150, up from $ 82 five years ago. For 2015, it was under $ 50 in many years.
Fans of splits claim they can expand the ownership base of a stock; it is easier for the small fry to buy stocks with lower price. The more people who are in the game, the more likely that demand for the shares will remain robust, making it likely that the price of the split shares will go up.
In addition, a split often signals that management feels confident about the future of a company, adding allure to its shares.
Critics point out that there is no guarantee that the value of a share will continue after the split. They also take issue with the argument for extended ownership. Average trading volume – measured by dollar-traded amounts – does not change much after splitting, according to a widely cited academic paper by Josef Lakonishok and Baruch Lev. What’s more, the recent creation of shareholding ownership by brokers such as Fidelity and Robinhood belies the idea that the absolute price level of a share could discourage current investors. And the proliferation of zero-commission brokerage accounts has expanded the potential trading base as well.
But the ultimate argument in favor of stock splitting is simple: Holders of shares that generally distribute make money, at least in the short term, and that resonates on Main Street and Wall Street. Investors love to “flush and repeat.” If something works, they will do it again and again until it fails.
Which shares seem most divided? Many of the most logical candidates are the highest prize. In addition to Berkshire, S&P companies with share prices above $ 1000 include Amazon.com (ticker: AMZN), Google Parent Alphabet (GOOGL), AutoZone (AZO), Chipotle Mexican Grill (CMG), Booking Holdings (BKNG), and real estate company NVR (NVR).
Of those six, Amazon,
Chipotle, Alphabet, and Booking are similar to split candidates, for several reasons. Investors could use them to create a potential split basket. But, since there is no guarantee that a division will happen, buyers must also have other reasons for buying the shares.
There is no magic at the $ 1000 level. Apple (AAPL) is a stock $ 460. The shares are split 4-for-1; they start trading on 31 August on a split basis. Ditto for shares of Tesla, which will be split 5-for-1.
There are 20 more shares listed at $ 400 to $ 1000 in the S&P. After looking at shares of Apple and Tesla, we imagine that some have thought about doing the same.
Write to Al Root at [email protected]
.
