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Eli Lilly and Company Message Board

  • aaabbbllleee aaabbbllleee Dec 22, 1997 4:31 PM Flag

    to James Keefer

    I think LLY is interested in keeping the price moderate, and splits the stock to keep it in reach of most investors. Each split is potential dilution of the stock so there is a downside to too many splits. It acts well in the 60's and support is nott overly institutional hence the lack of extreme volatility.

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    • I think the idea behind splits was that if the stock is at a price that people can afford more people will look at it and thus more people may be willing to buy it. Cheaper cost to get a round lot.
      But I things have changed, costs of trades has dropped in price due to discount brokers, and the number of mutual funds has exploded. Does it really matter to a mutual fund if the price of a stock is $100 or $50 if the total value is the same.

      Really doesn't the intrinstic value of the company go down? If prior to the split lets say the value of the assets and
      future cash flow was $100 million (small company). Now the company splits the stock. The future cash flow does not change, but the
      assets do. The company had to spend some money to split the stock. Thus there are less assets than before. Now, this is really just
      theory, because as you pointed out the market view a split as a vote of confidence by management. And In LLY's case this is true.

      I just wonder if share holder value would not be better served by using the money to split stocks some where else. R&D, debt re-payment, buy back of shares.

      • 1 Reply to keefer_james
      • The cost to split a stock is minimal. I'm not sure I
        understand the connection you are trying to make to
        asset growth. There is no connection as far as I
        can see. Any asset growth would be due to a seperate
        set of decisions by management, not due to a stock
        split per se. However, if you view a stock split as
        a sign of expected continued growh, then an increase in
        assets would be a likely outcome. But correlation does
        not necessarily establish causation.

        The age old explanation of having a stock split is to
        "keep the stock price within the average investors reach".
        Someone mentioned the issue of most stock be held in
        funds so does price really matter. I would concur, but
        the PERCEPTION among the public is still positive with
        a stock price below $100. Speaking of perceptions, that
        is really the primary value of a stock split in my mind.
        Stock prices are primarily influenced by EXPECTATIONS.
        A stock split is widely viewed as an affirmation by
        management that the company's prospects look good.
        In fact, I believe there have been studies done to
        show that the correlation is statistically significant.
        There are investment strategies that focus on stocks
        that are poised to split or have announced splits.

    • Stock splits are nothing more than a way for companies to keep their stock price within the reach of average investors.
      There is no real downside to a split unless the company is managed by idiots, and they keep splitting it until the price is a
      nickel. If a company like Lilly splits 2-1, the eps is cut in half, but so is the price. The P/E remains the same until the stock
      moves up again (which is a good thing!). On a split, the number of issued and outstanding shares is adjusted, but the total equity
      of the firm remains the same.

      Question for the day: Would a company split their stock if they thought things were headed right for the crapper?

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