Network security expert Palo Alto Networks (PANW 0.91%) is splitting its stock soon. This is largely a mathematical exercise that makes no real difference to most investors, with a handful of important exceptions. There are two groups of people who will see a real difference after this stock split.
Insiders taking part in Palo Alto's stock-based incentive program
Management made it clear that this is a driving force behind the stock split.
"Because the market price of our stock has increased significantly since our initial public offering, the stock split will enable employees to acquire more whole shares of our stock through equity awards and more easily participate in our employee stock purchase plan," says the official sheet of frequently asked questions for this accounting move.
And it really does make a difference in some situations. For example, let's say you qualified for $1,500 of these incentives. At the current price of $560 per share, you'd get two shares with a total value of $1,120 and forfeit the remaining $380. But after the 3-for-1 split, the hypothetical payout would be eight whole shares worth $1,493, leaving just $7 of earned bonuses on the table. That's an extreme example, of course, but some Palo Alto workers will run into situations just like that.
Investors who can't or won't buy fractional shares
For many investors on the open market, the split won't make any difference at all. Most stock brokerages will let you buy and sell fractional shares nowadays, so if you only have $190 to spend, you could simply invest it in one-third of a Palo Alto share today. Many popular brokers provide this service today, led by pioneer Interactive Brokers and iconoclast Robinhood Markets. The trading industry as a whole is moving in this direction.
However, fractional shares are not yet available on a handful of trading platforms. For instance, both E*Trade and TD Ameritrade lack the fractional shares feature so far. You can buy a sliver of a share through dividend reinvestment programs on these platforms, but they won't let you place an order for a sliced-up stub.
This deficiency probably won't last too long, though. E*Trade parent company Morgan Stanley recently rolled out fractional share investments to its unified managed account clients, and TD Ameritrade owner Charles Schwab has offered a limited type of fractional-share investing since 2020.
Anyway, the fact is that some investors don't have access to fractional shares yet. In this group, people with smaller investing budgets will appreciate the lower entry price for Palo Alto's stock. The same is true for investors with a larger budget and a hankering for more fine-grained control over each position's size.
In Palo Alto's words, "the stock split may make our stock more accessible to a broader base of investors."
Don't worry -- three small slices are just as delicious as one triple-sized slice. Image source: Getty Images.
When is Palo Alto's stock splitting, again?
Palo Alto Networks isn't wasting any time with its 3-for-1 stock split. The split was announced as part of the company's fourth-quarter report on Aug. 22 and will take place after the closing bell on Sept. 13. That's a quick turnaround.
Palo Alto's unusual stock structure greatly accelerated the process. The company entered the public market in 2012 with 1 billion shares authorized but only 68.4 million stubs actually issued on the open market. By the end of April 2022, the shares outstanding had increased to 99.6 million. Palo Alto's board of directors has plenty of room to triple the share count without first asking shareholders to approve a matching increase in shares authorized. In fact, it could run another 3-for-1 split before running into that invisible wall.
Apart from a more efficient incentive program and a broader base of potential investors, the stock split also serves as a vote of confidence in Palo Alto's future.
"[The stock split] is also supported by our underlying confidence in our continued business momentum," CFO Dipak Golechha said in last week's earnings call. The stock has indeed gained 22% over the last year while the broader market posted double-digit losses instead. If that trend continues, Palo Alto might want to perform another stock split in the next five to 10 years.
