Rocky Mountain Chocolate Factory (Nasdaq: RMCF), a Colorado-based confectioner with a $35 million market capitalization, split its stock this past week, issuing three shares for every two.
There are people who get excited about stock splits, since they like having more slices of the same pie. There may also be some good reasons for a stock split: A company whose stock has appreciated up into the hundreds of dollars per share might want to initiate a split so that smaller investors could buy shares to improve liquidity and attract interest from researchers.
Most American companies tend to like individual share prices between $10 and $100, which goes back to the days when a penalty was incurred for buying or selling shares in less than a round lot (100 shares). This is why companies with massive individual share prices such as TheWashington Post Co. (NYSE: WPO), White Mountains (NYSE: WTM), Berkshire Hathaway (NYSE: BRK.A), and the like are somewhat rare.
I don't happen to agree that any of these things matter that much, but I could see the basis for the argument.
I cannot help, however, but heap scorn on the motivations for Rocky Mountain Chocolate Factory's stock split. We're not talking about a $100 stock here; the company's shares had, after a fairly substantial gain, only traded in the $13 range in January. Yep, that's right. They split a $13 stock 3-2. Because, after all, you don't want to miss out on those investors who cannot afford $13 a stub but who'd be all in for $8.50, right?
The company's board of directors stated that they wanted to increase liquidity in the shares and "increase the appeal of RMCF shares to institutional investors." Sure, if those institutional investors happen to be idiots. We're talking about a company with about $150,000 in average daily volume before the split. How much in dollar value will the trading volume be after the split? Yep, $150,000. That investors are trading smaller shares does very little to make this tiny company more attractive.
Management continues: "We consider the stock split, along with the cash dividend policy that was implemented earlier in the fiscal year, as evidence of a strong commitment by management and the Board of Directors to the long-term enhancement of shareholder value." I'm with you on the dividend, currently yielding 2.3%. But what could splitting a $13 stock possibly have to do with enhancing shareholder value? Want to be a Hidden Gem? Concentrate on the business, and the investors will come.
You get the feeling that some investor relations consultant went to the board and said, "Hey, you know what investors really like? A stock split! It could make the stock go up, and make people notice you!"
OK, you've been noticed. Splitting a stock does nothing to enhance shareholder value. Furthermore, a micro cap splitting a $13 stock has the hallmarks of a promotion job, not of a company that gives a whit about really delivering value. The business wags the stock, not the other way around. It's revolting to see yet another board that doesn't seem to get that.
Bill Mann owns shares in Berkshire Hathaway and White Mountains Insurance.
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