|
Answer:
Dear
Sebastian,
Yes...it
probably is a good thing. Generally, companies decide
to split their shares when they have confidence in
both the overall market and in their own company.
Management rarely decides to split its shares if it
thinks that the market will fall or that the company
is in trouble.
According
to StockSplits (www.stocksplits.net),
last year about 200 companies announced splits. That
was up 7% over the number of splits in 2002. (The
number of companies in 2000 was 375.)
As
we go to press, so far this year (2004), 23 companies
have announced they will split their shares.
So
what has happened in your portfolio is part of a larger
trend, reflecting the fact that the market has taken
an upward turn.
What
is a split?
As
you probably know, a split is really a bookkeeping
action in which the company cuts its share price and
at the same time boosts the number of shares outstanding.
If it is a 2-for-1 split, for example, shareholders
get twice the number of shares but the price per share
is cut in half.
Think
of it this way -- a stock split is like receiving
two $10 bills for a $20. It's really that simple.
The company simply increases its number of outstanding
shares. There is no change in your equity. In other
words, you now have two pieces of paper but your $20
is still only worth $20.
Splits
come in many shapes and sizes. They can be 2-for-1,
3-for-1, even a reverse split, such as 1:4.
Companies
are often motivated to split their shares when the
price has risen so much that it is out of the range
of the smaller investor.
The
impact of a split
Keep
these 5 points in mind, when you hear about an impending
stock split:
1)
Increased interest
While
the value of the money in your pocket has not changed,
stock splits are a positive in that they stimulate
investor interest. This, of course, is one of the
reasons why management declares a split -- to increase
the visibility of its shares in hopes that more people
will buy the stock. With increased volume, on the
buy side, the share price is likely to rise, although
there's no guarantee that it will.
2)
A higher dividend
A
split may also mean that the company will increase
its cash dividend. A study done by the New York Stock
Exchange a few years ago found that about 58% of the
companies surveyed said they increased their cash
dividends at or around the time of their stock split.
3)
A lower price
Splits
almost always bring a stock down into a more popular
trading range because the split decreases the price
per share. Management realizes that an extremely high
price does not go over well with many small individual
investors and that psychologically, these investors
are apt to shy away from buying 100 shares of an $80
stock but are less hesitant to buy 200 shares at $40/share.
4)
Buy before or after a split?
This
is a very common question and over the years there
have been a number of studies on the topic with the
results supporting both sides of the issue. These
two survey findings, however, appear to be sound:
-
In 97% of the cases studied, the stock increased
on average 5.2% the day the split was announced.
- For
six months after the split, 75% of the stocks split
outperformed the Dow. But in all fairness, this
study did not address the issue of whether the stock
split caused the rise in price or something else
did, such as increased earnings.
So,
it appears that the best time to own a splitting stock
is prior to or immediately after the announcement.
5)
Increased future earnings
One
conclusion we can draw fairly conclusively is that
when management decides to split its stock it's because
the stock has moved up in price over time and the
company feels pretty confident that future earnings
growth will continue.
CAUTION:
The mirror image of the stock split is the reverse
split, generally a negative event. You'll find all
the pros and cons of reverse splits discussed in one
of my previous columns. CLICK
HERE.
|
