Say Farewell to Stock Splits

Anyone who remembers the go-go trading days of the 1990s probably remembers when stock splits were trophies.

Market darlings -- particularly consumer-facing companies -- would routinely declare 2-for-1 or even 3-for-2 stock splits as their share prices climbed up the double-digit ladder. If you were a firecracker of a dot-com, a casual steakhouse, or a magnetic mall retailer, forward splits were shareholder candy.

Oh, where have all the stock splits gone?

Hundreds are the new tens
Apple (Nasdaq: AAPL  ) is now trading above the $200 mark. Save for a brief spell in September 2004, Google (Nasdaq: GOOG  ) has spent its entire public life in the hundreds. It closed at $541.30 yesterday.

The market darlings of this generation don't appear to split, and that's creating peer pressure on the companies that would have probably declared 2-for-1 splits -- or perhaps even 3-to-1 or 4-to-1 treatments at this point -- in the past.

Let's chew on Apple. Its last split was nearly five years ago. The Cupertino cutie opted for a 2-for-1 split when its stock was at nearly $89 in February 2005. Its previous split took place five years earlier, as its stock crossed the $100 mark. You then have to go all the way back to 1987, when it announced another 2-for-1 split as its stock hit $80.

If history is any kind of teacher, Apple should have gone the split route when its stock was half of today's price. Why is it holding back now? Did we see the last of Apple's two-fers?

I have two theories. Let's see whether you can buy into either one -- or if you have a third scenario in mind.

1. Share prices don't matter anymore
When stock splits were all the rage, the moves were seen as shareholder-friendly. Individual investors were buying stocks in round lots, so it was more attractive to buy 100 shares of a stock at $30 than to buy 50 shares at $60.

There isn't a lot that is odd about odd lots these days. Most of the leading discount brokers are charging less than $10 per stock trade, making it economically feasible to buy equities in smaller, bite-sized chunks.

Forget Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) recent split on its Class B shares. The 50-for-1 operation was done to ease the Burlington Northern purchase. Warren Buffett resisted ordering splits on his Class A shares when they were popular; he is certainly not going to cave in now.

We also live in broker-friendly times when clients can have dividends reinvested in fractional shares. In short, we don't need to buy our stock certificates in groups of hundreds anymore, so the zero-sum maneuver isn't necessary.

2. Share price is the new trophy
My other theory is that companies are now treating their stock prices as if they were gunning for the "high scores" list on a video game.

I bet you that China's Baidu (Nasdaq: BIDU  ) -- whose shares hit an all-time high of $493.96 yesterday -- wouldn't dream of declaring a split until the higher-priced Google does.

As Apple finds itself tactically pitted against Google more and more, I would argue that Apple hasn't split the way it might have in the past so its stock price doesn't appear even smaller when lining up alongside Big G.

Let's bring priceline.com (Nasdaq: PCLN  ) into the conversation. The popular travel portal was humbled in 2003. It declared a 1-for-6 reverse split, made effective the day its stock closed at $4.24. This is the kind of scar that would normally call for a forward split to celebrate its eventual turnaround, letting the world know that it has overcome the reverse. Well, it hasn't happened. Shares of priceline.com recently broke through the $200 ceiling, with no split declaration in sight.

Your turn
Stocks trading in the triple digits -- or higher, as in Berkshire Hathaway's case with its original Class A shares -- used to be anomalies. They're a lot easier to spot these days.

During the 1990s, stocks declared splits to be in the sweet spot between $20 and $40. They're not bothering to hit the barber anymore.

A quick screen on Yahoo! Finance finds 57 stocks trading above $100. Even ugly sectors like real estate developers and newspaper companies are represented on the list, and that's going to keep their lower-priced rivals from considering splits. As long as First Solar (Nasdaq: FSLR  ) is trading at roughly $120, how many solar energy plays will consider widening the price gap with stock split declarations?

Rest in pieces, stock splits.

Is there another explanation for the lack of stock splits? Share your thoughts in the comment box at the bottom of this page.

Baidu, First Solar, and Google are Motley Fool Rule Breakers picks. Apple, Berkshire Hathaway, and priceline.com are Motley Fool Stock Advisor recommendations. The Fool owns shares of Berkshire Hathaway, which is also a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz has never split, though he has had a splitting headache. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2010, at 3:43 PM, Superdrol wrote:

    Liquidity and option pricing. That's why I'd prefer stock spilts.

  • Report this Comment On February 17, 2010, at 4:12 PM, lemoneater wrote:

    Interesting article.The only split I've seen in the short time I've been investing was Southern Copper or PCU which had a 3 for 1 when the share price was just over $100. Now PCU has changed its ticker to SCCO. On the other hand, ISRG has shown no indication of splitting although its shares are more than $300.

  • Report this Comment On February 17, 2010, at 4:50 PM, RobertC314 wrote:

    Agreed - if you want to do anything with options you're still stuck in the 100 share lots. Very inconvenient for the little guys just trying to learn.

  • Report this Comment On February 18, 2010, at 8:11 AM, HighGrowth wrote:

    Well, actually share price does has an impact on how you manage your portfolio. I dabble in a lot of speculative investments at a few thousand tossed into an initial position. If you can only buy 5 shares with, it's very harder to divest half of your position once something doubles or triples and you feel dumb doing it.

    I have actually heard people say they wouldn't buy shares in Google because the share price is so high (the false impression is that it has risen so high that there is little appreciation left), so Google and others whose shares are in the hundreds is actually lowering it's upside potential by not splitting the shares as it is alienating a lot of small time investors who want a little piece of the pie and are likely the ones who would take it much higher.

    Thinking back to the heyday of tech investments (in bubble times: 1998-1999). 9 out of 10 times when a stock split there was a price surge upwards right after the split because the shares became "affordable" to many more, psychologically at least - in reality, as we all know, there is no difference in the nature of the investment because of this. I used to count on this surge, and when I would hear of a split in a good company I would always buy in more, and sell off that part after split because I could pretty much count on a reasonable profit from this tendency.

  • Report this Comment On February 18, 2010, at 9:14 AM, dsp444 wrote:

    ditto options comments. Google / Apple are not "options" for options strategies for a lot of people.

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