<FOOLISH FOUR PORTFOLIO>
WOODSTOCK, NY (August 17, 1999) -- In last week's column, we explored the rudimentary aspects of banana, uh, stock splits. Today, we'll tackle the most confusing aspects of splits.
HOT SPLIT TIP #1: THE ONLY PERSON WHO RECEIVES THE SPLIT IS THE PERSON WHO HOLDS THE STOCK AT MARKET CLOSE THE DAY OF THE SPLIT!
When a company announces a split, the confusion begins in a statement that looks something like this:
"Chocolate Fudge Corp. (Ticker: MESS) today announced that its Board of Directors has approved a two-for-one split to be effected in the form of a stock dividend of one share of common stock for each share of the Company's outstanding common stock. The two-for-one split will be effective for shareholders of record on September 1, with a distribution date of September 13."
Split mumbo jumbo 1: "The two-for-one split will be effective on September 1."
The first date in any split announcement always refers to the Record Date, which is the day the corporation closes its corporate books to determine the stockholders who are entitled to the dividend. (I know, I know, it says "effective" date -- but they don't exactly mean it.)
On the Record Date, the transfer agent (usually a bank) will send the extra shares to investors who own shares as of that date. They only "send" the shares, however; they actually don't become effective until the...
Split mumbo jumbo 2: Payment Date, a.k.a. Effective Date, a.k.a. Distribution Date. (This date seems to have more names than Mark McGwire has home runs.)
This refers to the date when the split actually takes place; the new price takes effect for trades at the opening of the next market day.
So, if a shareholder should (gasp!) sell his shares between the Record Date and the Payment Date, his shares are transferred to the new buyer with a "due bill" attached, which entitles the new owner to the split, BECAUSE...
HOT SPLIT TIP #2: THE ONLY PERSON WHO RECEIVES THE SPLIT IS THE PERSON WHO HOLDS THE STOCK AT MARKET CLOSE THE DAY OF THE SPLIT!
Split mumbo jumbo 3: "...a two-for-one split to be effected in the form of a stock dividend."
Now they're giving us dividends! We usually think of "dividends" as those nice, quarterly perks our Foolish Four stocks delight us with; but in "taxspeak," stock splits are called stock dividends.
The difference between a stock split and a stock dividend is technical; the practical effect of both is the same. A stock dividend is shown in the accounts as a transfer from retained earnings to equity capital. On the balance sheet, a stock split is shown as a reduction in the par value of each share. When a stock dividend is given as a split, you do not have to pay taxes on it.
If the above paragraph fascinated you and you are dying to know more about the technical ins-and-outs of dividends, please visit our Tax Q&A, where TMF Taxes explains it all for you.
So what happens if you buy stock between the Record Date and the Effective Date?
HOT SPLIT TIP #3: THE ONLY PERSON WHO RECEIVES THE SPLIT IS THE PERSON WHO HOLDS THE STOCK AT MARKET CLOSE THE DAY OF THE SPLIT!
The Record Date: Accounting purposes only; not significant to individual investors.
The Effective Date: The important one. If you own it at close of market on this date, you will receive the split shares.
Stock Dividend: Split nomenclature for tax geeks.
And now, on to COST BASIS...
After a split, shareholders will need to recalculate their cost basis for the newly split shares. In reality, this is only necessary when the shares are sold; but since we Fools are long-term investors, we probably won't remember all the splits we've received from our companies by the time we sell.
Recalculating the cost basis is easy, especially since the shareholder's cost has not changed at all. It's the same amount of money paid for the original block of shares, including commissions. The new cost per share is simply the total cost divided by the new share count.
One last thing: Remember that when a stock splits, all related numbers need to be adjusted accordingly, including earnings per share (EPS) and dividends (the kind they pay on a quarterly basis).
If you're still hungry for information about splits, please move your place setting to the following tables:
David Gardner on splits and pizza:
Ann Coleman on splits and coconut cream pie:
Rob Landley on splits with no food references:
Message Board (where you can begin a discussion on splits and food):
I hope everything is clear now. Funny, though -- I have a splitting headache!