Who Will Go for a Stock Split Next?

Did Google (Nasdaq: GOOG  ) just give stock splits a bad name?

There have been plenty of critics of the search engine giant's move to declare what will essentially be a two-for-one stock split. Fellow Fools Alyce Lomax, Tim Beyers, and Anders Bylund were somewhere between incensed to cynically amused by the move.

I'm not going to rehash the merits of introducing a third class of non-voting shares to execute the stock split. What I find interesting here is that Google -- the company that has laughed off calls for zero-sum stock splits -- is actually going through with it.

Big G, after all, was the company that defiantly chose to go public at an original pricing range as high as $135 a stub before settling for $85. Most companies in that situation would have simply executed a stock split before the offering to get its share price down in the $20 range.

Not Google.

The stock opened at $100, and it never looked back.

Three years later the stock peaked at $747.24. There was no split then. The shares are trading quite a bit lower than that now, yet here comes the split.

Swinging away in the on-deck circle
We live in a copycat world. If Google believes that it's not beyond doubling the number of shares outstanding for the sake of halving its sticker price, why should the other centenarians sit still?

It wouldn't be a surprise to see some of the other popular companies with triple-digit-share prices announce stock splits. Let's go over some of the more obvious candidates.

  • Apple (Nasdaq: AAPL  ) made it a sport to split its stock whenever it approached triple digits. Apple served up two-for-one stock splits in 1987, 2000, and 2005. However, its mind-set seemed to change once Google continued to climb shortly after its IPO. It became a race. Apple has finally caught up, and maybe this explains why Google would rather go for a split than see Apple organically pass it by. Either way, Apple has little reason to dodge a split now. A 10-for-one split sounds about right.
  • priceline.com (Nasdaq: PCLN  ) was pounded to a pulp after the dot-com bubble popped. The "name your own price" travel portal even declared a one-for-six reverse stock split -- exchanging every six shares of its low-priced stock for a single new share at six times the price -- in 2003. One has to wonder why Priceline is taking this long to go for a split. Does a company known for its low-priced-travel deals really want to be associated with a price of $715? That's a pretty steep one-way trip. Wouldn't it be poetic justice to at least declare a six-for-one stock split next year -- on the anniversary of its reverse?
  • Netflix (Nasdaq: NFLX  ) is an enigma. To paraphrase an old Peter Lynch line, Netflix declared a five-for-one stock split last summer without issuing any new shares. Yes, the flick fave saw its stock peak above $300 in July of last year, only to find its battered stock trading for a little more than $60 five months later. Netflix has charged its way back into the triple digits this year, but the volatility makes it difficult for Netflix to confidently split its stock at this point. There may be room for a two-for-one or perhaps even a three-for-one to send out a confident message, but it's likely to stay away for now. For those keeping score at home, Netflix did push through a two-for-one split in 2004 when its stock was nearing $70.
  • Baidu (Nasdaq: BIDU  ) went for a stock split two years ago, splitting 10-for-one when its stock crossed the $700 mark. There would seem to be little reason for it to go that route again with its stock at $147.49. However, wouldn't a two-for-one about now put it back where it was after the 10-for-one split two years ago?

A banana split
Stock splits don't mean a thing, of course. Who cares if there are 40 million shares outstanding at $10 or four million shares outstanding at $100. It's still a $400 million company.

We live in a golden age of dirt cheap brokerage commissions. You don't need to buy stocks in round lots. If you only have enough money for five shares of Apple, go for it!

However, there are psychological reasons to execute stock splits. Investors often interpret a forward stock split as a good sign that the fundamentals are solid. If not, why would a company seek out a lower share price?

Then there is the matter of options. This isn't just about greedy speculation. With the right strategy, options can actually reduce risk.

Someone can buy 100 shares of Netflix, following that up by selling a single covered call contract at a slightly higher price point than where Netflix is now. The investor pockets the premium paid and only has to give up the 100 shares if it hits or exceeds the higher strike price just before the call expires. This is the one time that stocks have to be purchased in round lots of 100, so the higher prices do eliminate some potential owners.

In the end, Google is the company that got us into the arms race mess. It's apparently about to be the one that gets us out.

Parting thoughts
Baidu and Google have been winners for Rule Breakers newsletter subscribers. They don't mind the triple-digit share prices. However, now it's time to discover the next Rule-Breaking multibagger. It's a free report. Want it? Get it.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Google. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Netflix, Baidu, priceline.com, Google, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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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 April 18, 2012, at 2:47 PM, EquityBull wrote:

    Biggest reason to split is investor psychology. People's minds are anchored to prices in the real world. You pay X for gas and Y for a car. Splits don't exist. The price is the price and higher prices "mean" something. Sometimes something good and other times something bad.

    In the world of stocks you cannot separate investor mentality when it comes to looking at share prices. High prices make people think "expensive" even with or without looking at valuation.

    Valuations suffer as a result as stocks get into these triple digit ranges. Witness the discount to growth that Google, Apple, Bidu and Berkshire all exhibit. Gross discount to growth actually. Why? Because people just can't release that anchor to price tags.

    Split apple 20 for 1 and get it to 30 bucks and watch the fast ride to 100 plus. At 30 bucks investors will think the stock is cheap/inexpensive once again and have no problem bidding it up to 100 (equivalent to 2000/share). However 99% of investors cannot wrap their head around a 2000/share price tag even if the company was earning 200/share with 500/share in cash.

    The stupidity of some of these co's to realize this is mind boggling. They are holding back shareholder value in a big way as well as employee enthusiasm for stock options going up. Do these co's really want to watch their stock trade at enormous discounts to growth and cash on their books? I guess so...or at least until they prove otherwise by splitting.

  • Report this Comment On April 18, 2012, at 2:58 PM, TMFZahrim wrote:

    Hey Rick, I don't mind Google doing a straight-up split -- that would have some merit thanks to the options-related effects you discussed later in the article.

    What gets my goat is the way Google makes an already complicated share structure even more complex, and only for the purpose of keeping absolute voting power in the hands of Larry, Sergey, and Eric until the end of time. If Google insists on diluting the share pool, then the current holders of voting majority should accept that their powers will fade too. But no. Not in Mountain View.

    I love Google in so many ways (and full disclosure: yes I own the stock), but that's a despicable move that shows zero respect for the common shareholder.

    Just thought I'd clear that up.

    Anders

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