Investors Singing the Stock Split Blues

by Marc Bastow | June 12, 2012 5:00 am

What ever happened to the go-go ’90s?

You remember those frothy, heady days? Stock markets were roaring, companies were growing like gangbusters, new product introductions streamed into the marketplace … and companies split their stock to allow for all that growth and to spread the prosperity. In fact, in 1997, 102 companies in the S&P 500 split their stock.

It appears those days ended in the early 2000s, and they’re not in any danger of coming back anytime soon. Indeed, the four most recent “high-profile” splits, Coca-Cola (NYSE:KO[1]), Dollar Tree (NASDAQ:DLTR[2]), Google (NASDAQ:GOOG[3]) and most recently[4] Under Armour (NYSE:UA[5]) are almost an anomaly. Last year, a mere 16 companies announced stock splits.

With high-flying stock prices attached to Apple (NASDAQ:AAPL[6], $575), Amazon (NASDAQ:AMZN[7], $225), Priceline (NASDAQ:PCLN[8], $650) and Chipotle (NYSE:CMG[9], $400), investors are scratching their heads, wondering “What gives?”

Well, I can think of at least three reasons why stock splits were all the rage back in the day, and how the mentality of those days works against the investors of today:

  1. What I call a “psychology of growth” ran through the fiber of many companies. In this case, that means they felt nothing could stop their momentum and growth, so stock splits (sometimes in lieu of dividends) were investors’ (and insiders’) “reward.”
  2. A more affordable price meant that shares were available to a wider range of retail investor. After all, even though the existing shareholders gain nothing from the actual split itself, anyone looking to get in does have an easier time at $50 per share than $100.
  3. Because growth was the catalyst for huge valuations and stock splits were the manifestation of that growth, investors assumed the stock would get a nice, potentially long-lasting pop immediately after the split.

But looking a little closer through the 1990s shows the (split) pool wasn’t really that deep. Looking at a handful of Dow stocks shows that, rather than a flood of splits, it was more like a trickle:

Stock Ticker Number of splitS
Caterpillar CAT 2
DuPont DD 1
Exxon Mobil XOM 1
Johnson & Johnson JNJ 2
Walt Disney DIS 2

So who was making the stock split noise that made the headlines in the ’90s? Tech companies, and it’s that legacy that perhaps colors the new high-flyers.

Here is a (short) list of tech high-flyers — who, by the way, still are alive and more than kicking — that made stock-split news in the 1990s:

Stock Ticker Number of splits
Cisco CSCO 9
Intel INTC 9
Microsoft MSFT 7
Oracle ORCL 5

Companies with high-priced stocks are now loath to approve share splits, and while no single theory serves to explain why, I think there’s several reasons:

  1. A high stock price is a bit of a corporate status symbol, signifying success and a vision of expected growth.
  2. Stock splits have questionable real benefits, as all that really occurs is more shares are dumped into the marketplace. That brings me to my third thought, which is …
  3. … retail investors really don’t matter that much to corporations. The days of the “gadfly” who owns 25 shares but gets time at the podium during the annual shareholder meeting are going by the wayside. A company can’t really call itself “investor-friendly” when its shares cost $500 a pop.

Of course, the fallout from at least some of this is that market volume is at a 10-year low, according to Bloomberg, and the trickle-down effect can be found in brokerage houses. Daily trading volume on all U.S. exchanges has fallen nearly 33% since 2008.

But don’t hold your breath waiting for a change of heart from eager CEOs hoping to make the retail investor happy.

If recent history is any guide, it just isn’t going to happen.

Marc Bastow is an Assistant Editor at As of this writing, he was long XOM, MSFT, INTC and JNJ.

  1. KO:
  2. DLTR:
  3. GOOG:
  4. most recently:
  5. UA:
  6. AAPL:
  7. AMZN:
  8. PCLN:
  9. CMG:

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