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.
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