Shares of Netflix (NFLX +1.15%) are trading near all-time highs these days. Stock splits are often used to bring surging stock prices back to smaller, more comfortable numbers. Netflix performed a 7-for-1 split just two years ago for that very reason. Is that stock-splitting history likely to repeat itself in 2017?
In my view, a Netflix stock split this year would be a shocker. Either way, investors shouldn't worry too much about stock splits, because they add little or no value to your investment.
What does a stock split really do?
Netflix does have a history of splitting its stock -- twice, over the span of 15 years on the market. Here are the details:
|
Date |
Split Ratio |
Share Price Before Split |
Share Price After Split |
Difference In Market Value |
|---|---|---|---|---|
|
February 12, 2004 |
2-for-1 |
$71.96 |
$37.30 |
4% |
|
July 15, 2015 |
7-for-1 |
$702.60 |
$98.13 |
(2%) |
Data source: Yahoo! Finance.
Not much happened. Share prices changed in tandem with the number of valid shares, resulting in a net difference of approximately zero. Low-single-digit price moves happen all the time to relatively volatile stocks like Netflix.
Netflix had issued 62 million shares of common stock as of the end of the first quarter of 2015. In the next report, the share count had soared to 436 million. At that point, Netflix also started reporting its older share counts as if the stock split had just always been there, so the second-quarter report showed 433.8 million shares for the first quarter of 2015. Divide that by seven and you get 61.97 million. Apart from rounding errors, that's the same figure as before.
So Netflix took the same share-based ownership contract and just divided it up a different way. It's like slicing your pie into 42 pieces instead of 6, but also serving up 7 smaller slices to replace each of the bigger original pastries. Same amount of pie; nobody wins and nobody loses.
These moves do not add value to your existing Netflix shares, nor do they take it away. It's mathematical gymnastics with little real-world value or utility.
Image source: Getty Images.
Why not pull the trigger?
So why should Netflix stay its hand from executing another stock split in 2017?
First, these splits really don't do much for shareholders. It's true that some cash-constrained investors might not be able to invest in Netflix if none of the previous splits had happened, pushing Netflix prices to thousands of dollars per share. And price-based market indexes like the Dow Jones Industrial Average can have their center of pricing balance disturbed if a new high-priced stock joins the party. That's why Apple (AAPL 2.15%) had to go through the motions with a 7-for-1 split of its own before joining the Dow in 2015.
And even if Netflix had an eye on Dow membership, several existing Dow components already sport similar or even larger share prices than Netflix these days. Index-skewing share prices should not be an issue here.
Otherwise, it really doesn't matter.
Moreover, Netflix shares may have raced higher in recent months, but share prices are still a long way from the wallet-bursting levels seen before the last split. You might see Netflix jumping through these paperwork hoops again if share prices climb past $500, $600, and $700 -- but that's unlikely to happen in 2017.
