Stock splits may come back into fashion

Consumer Reports

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You might remember stock splits from Back in the Day, when we listened to compact disks and received bills by mail. It's that accounting device where a corporate board decides to turn your 100 shares of a $200 stock into, say, 400 shares of $50 stock. It is done, in part, as an expression of confidence that share prices will continue to rise in the future.

For decades, it had been a habit of most large corporations to have their stock trade somewhere in the two-digit range. Otherwise, the fear was that it would appear too expensive to retail investors, who had traditionally purchased shares in multiples of 100.

As recently as 1997, one in five companies in the Standard & Poor's 500 index split their shares annually. But over the past five years, only 2 percent of the S&P 500 have split their shares. The explanations vary. One obvious reason is that the choppy stock market of the past 10 years have sapped the confidence of the boards approving the stock split.

But there may be other factors as well. The popularity of exchange-traded funds means that more households are investing though funds instead of individual holdings. And the institutions that manage the ETFs are indifferent if a stock in a fund's basket is trading at $50 or $500. Finally, thanks to competition among discount brokerages, even if you purchase fewer than 100 shares, commissions usually cost the same.

The math of stock splits is obviously zero-sum -- slicing an apple pie or a share of Apple into quarters doesn't make the whole any larger. Warren Buffett, among others, waxes sarcastic about stock splits, wondering aloud why some prefer ten sawbucks to a C-note. Nonetheless, research has shown that stock splits may be good for shareholders. Numerous studies over the past 30 years suggest that split stocks provide short- and long-term excess returns.

So don't throw stock splits onto the nostalgia pile just yet--they may once again come back this year, if average share price is any indication. Generally, the higher the average share price of a stock in the S&P 500 index, the more companies decide that splitting their shares is in their investors' interest. Currently, the average share price of an S&P 500 stock is $65.41, compared to about $30 in 2008.


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