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Should Google Split?

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Don't wait up for a stock-split announcement from Google (Nasdaq: GOOG  ) .

"We're not going to split the stock, at least not for the present," CEO Eric Schmidt told Jim Cramer on CNBC's Mad Money earlier this week.

Score one for Schmidt on the clever word choice. He obviously means "present" as in the near term. However, he could very well imply "present" as in a gift, which is how investors often mistakenly see the zero-sum events that are stock splits.

After all, if Google at $500 declares a 10-for-1 stock split, it doesn't matter if you have 100 shares at $500 or 1,000 shares at $50. You still have a $50,000 stake in the world's leading Web search engine.

You might like to see Google bring its shares down to a more accessible price, or you may think splits are stupid and unnecessary. No matter which side of the fence you find yourself on, you're correct. This is a subjective matter. But let's take a closer look at both sides of the argument.

Yes, Google should split
During the go-go 1990s, stock splits were going on everywhere. The moment a consumer-facing company saw its price go from $30 to approaching $50, you just knew that a 2-for-1 or a 3-for-2 split announcement was coming.

A forward split, ultimately, is about confidence. There's an unspoken assumption that the splitting company doesn't mind marking down its stock price, since things are going well enough to move the price back up again. Consequently, stocks typically open slightly higher after a split is declared.

Google, of course, has no self-esteem problems. However, even the similarly cocky Apple (Nasdaq: AAPL  ) has pulled off a pair of 2-for-1 stocks splits this decade.

The biggest case for a split, though, comes from the perspective of recruiting and employee retention. Code monkeys are brilliant in their niche, but they don't necessarily know their Ps from their Es. They might see a share price in the hundreds and just assume it's pricey. What they fail to realize is the importance of the number of shares that the stock price is being divided into, to arrive at a company's market cap. And they might not understand the simple balance-sheet math that reveals a company's enterprise value.

Consider this: Even though Sirius XM Radio (Nasdaq: SIRI  ) started the trading day at $1.38 a share, it's not a penny stock. It's a $4 billion company. Meanwhile, pork and transportation specialist Seaboard (AMEX: SEB  ) has a $1,600 stock, but its market cap is just half of what the satellite-radio provider can claim.

Why does any of this matter? Well, have you seen Google lately? Executives have been leaving in droves in recent months. Stock options are a major part of most tech-company compensation packages, so creating the psychological effect of offering employees a "cheaper" stock could help with retention efforts. Unsophisticated investors may prefer a stock meandering at $50 than one at $500, under the flawed assumption that it has a better chance to move higher.

Stock-based acquisitions also get a boost when the perception exists that a low stock price will head higher. Google is blessed with fat pockets, so it doesn't need to use stock as legal tender. However, you never know when it might want to.

No, Google should not split
Have you seen a stock fall apart after a split? It's not pretty.

Sun Microsystems (Nasdaq: JAVA  ) is a perfect example. The company declared a 2-for-1 split in 1999 and then raced back to declare another 2-for-1 split just 12 months later. The bottom fell out of the stock when the dot-com bubble popped, and Sun's most recent split move was a 1-for-4 reverse split in November.

Google is unlikely to become a penny stock as a direct result of slumping after a split, but why chance it? A high stock price may be a recruiting and deal-making deterrent, but a price can also be too low. Rival Yahoo! (Nasdaq: YHOO  ) has been losing plenty of executives with its stock price waffling between the high teens and the low 20s.

More to the point, an unusually high stock price can be seen as a badge of long-term success. Berkshire Hathaway (NYSE: BRK-A  ) doesn't split its stock, and it isn't exactly smarting. Keep in mind that Google is a company that was originally set to go public at a price as high as $135 before settling for $85. It obviously has no fears of seemingly high prices. That the stock is nearly a six-bagger since the IPO only vindicates the company's strategy.

Stake your claim
Splits made sense when investors used to buy stocks in round lots, but the proliferation of dirt-cheap online discount brokers that charge just a few bucks per trade makes it financially feasible nowadays to pick up a smaller stake. If you can afford only five shares of Google, forking over a $10 commission is just 0.4% of the transaction.

So where do you stand? Let me know in the comment box at the bottom of the page if you think Google should -- or should not -- split its shares. It's a zero-sum game, but I'm guessing that no one is neutral on the subject.

Related Foolishness:

Berkshire Hathaway is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Berkshire Hathaway and Apple are Motley Fool Stock Advisor picks. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz thinks that thinking about splits can give you a splitting headache. He owns no shares in any of the stocks in this story and 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 (9) | Recommend This Article (3)

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 August 14, 2008, at 4:33 PM, Uruzone wrote:

    I'm so glad you brought up this subject, Rick! It seems no one really discusses splits and their effects.

    I think one important thing that you only touched on is the psychological effect of a stock split.

    I don't believe that Wal-Mart stock would be sitting at over $25,000/share had they never split, even though that's their equivalent value right now. I can't put my finger on exactly *why* I feel that way, but I think that at the simplest level, when something gets that expensive, fewer people buy it. The actual value of the company becomes overshadowed by the perceived value. At $25,000/share, I would feel that the appreciation of Wal-Mart stock was well behind it, and that I had missed the boat.

    Then there's the practicality of it. If I had $10,000 to invest, I would not be able to buy .4 (that's four-tenths) shares of WMT at $25,000/share. Consequently, I put my $10,000 elsewhere.

    So I think splits are GOOD for stockholders (even Google stockholders), because it maintains the price of a stock in a range that encourages trading of its shares. Without trading, the stock stagnates, and may unfairly lose value.

  • Report this Comment On August 14, 2008, at 4:46 PM, aj5js35 wrote:

    Very thought-provoking article. I think a split might hurt their ego rather than their bottom line. What galls me is that they can charge such a high price for their stock, but won't pay a dividend.

  • Report this Comment On August 14, 2008, at 8:26 PM, Somewhere wrote:

    I don't mind stocks that trade for hundreds of dollars per share, but when it gets to be in the *thousands* of dollars per share, it gets to be out of my price range. I just don't have that much money to plunk down. Being one of the "little guys," keeping share prices down to under $1,000/share allows me to invest in it. It would take me decades to save enough money to buy a single class A share of Berkshire, and by the time I saved enough, the stock would be trading even higher. It shouldn't be just a rich man's game.

  • Report this Comment On August 15, 2008, at 11:20 AM, freshgrad wrote:

    I am seriously offended that you call a software developer a code monkey!

  • Report this Comment On August 16, 2008, at 10:05 AM, TMFBreakerRick wrote:

    Freshgrad, yes, but to be fair I did call them "brilliant" code monkeys. For the others reading this who don't get the code monkey reference:

  • Report this Comment On August 17, 2008, at 2:05 PM, forestlgrady wrote:

    Splits are just tricks , I like the idea of a company having the confidence and intelligence to say "why waste our time talking about a split when it makes no difference, lets talk about R&D or sales, etc". I get 100 free online trades, so even being a little guy I can buy 1 or 2 shares of GOOG, GS, or even a BRK-B share.

  • Report this Comment On August 19, 2008, at 2:03 PM, PSU69 wrote:

    Many folks just can not get their head around $500 or $700 a share. I own GOOG.

    Personally, I hope they remain as is.

  • Report this Comment On August 23, 2008, at 11:47 PM, snowfreeze wrote:

    WHY. So that you have a harder time selling it? You make no sense at all, PSU69. I own some GOOG too. I can't wait til they break it 10-1. $50 a share is a lot easier to swallow in chunks than is the whole cow.

  • Report this Comment On September 11, 2009, at 3:25 AM, Pangch wrote:

    I concur with the 1st post comment. $50 is easier to swallow than $500.

    The higher the stock price, the more difficult for individuals to be able to own it.

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