After the bell yesterday, medical device maker St. Jude Medical (NYSE:STJ) announced a 2-for-1 stock split. As a result, St. Jude shares -- which had gained $0.07 in regular trading -- got another $0.98, or 1.35% boost, to $73.68 in after-hours trading.
Of course we know that's not true.
The stock actually did climb $0.98 to $73.68 in after-hours trading, but the fact that it did is wholly irrelevant. As Foolish (note the capital "F") investors know, the actual stock split event has absolutely zero impact on a stock's value. Yet no less than three market news services covering the announcement noted the after-hours gains in contrast to the regular day's action; at least one went as far as to put St. Jude on its "stocks to watch" list for Tuesday.
Here's the math: St. Jude has 178 million shares outstanding. After the stock splits on Nov. 22, there will be exactly twice as many shares outstanding worth exactly half as much. If the company is worth exactly $13 billion before the split, it will still be worth exactly $13 billion after the split. No more, no less.
It's really that simple.
It's generally true that stocks that split tend to perform better over the long run than those that don't, especially compared with companies that undergo a reverse split (see A Reverse Split -- Ouch!). Companies such as Coca-Cola (NYSE:KO), Microsoft (NASDAQ:MSFT), Dell (NASDAQ:DELL), and eBay (NASDAQ:EBAY) are pretty good examples. But what's important to note is that it is not the split itself that causes outperformance; splits generally reflect a rise in a company's stock price, which over the long run is a reflection of improved business performance and increasing value.
However, as I noted last year in another stock split discussion regarding an episode of The Sopranos (see Sopranos Stock Splits), a splitting stock is hardly a guarantee against the failure of buying absurdly overpriced stocks -- just ask Microsoft and Time Warner (NYSE:TWX). Neither is a stock that doesn't split the definitive gauge of a bum stock, with Fool favorite Berkshire Hathaway (NYSE:BRK.A) being the ubiquitous example.
The bottom line is that if St. Jude's stock went up following the announcement, it wasn't because the stock is worth any more than it was yesterday. Keep that in mind the next time you read about a stock split.
For more on stock splits, check out:
Fool contributor Jeff Hwang owns shares of eBay and Berkshire Hathaway.
