Stock Splits Are Back In Fashion: Three Cheers, We Say

We are huge fans of stock splits (forward splits, that is) for a lot of reasons. We realized that we last wrote about them ten years ago, when there was a sudden upsurge, much like we are seeing now – like at Nvidia (10 for 1) Walmart (3 for 1) and Chipotle with a whopping 50 for 1 - so here’s an update:

At all three of the companies mentioned, the motive cited was “to make our stock more affordable for our employees and our customers” - since there is lots of evidence that share ownership translates directly to better service from employees, higher sales and an enhanced sense of “ownership” all around that boosts loyalty, sales and profits.

A very important point to note, a stock split sends very positive “bullish signals” to prospective investors since companies are wisely very reluctant to split the stock unless the long-term outlook is bright and the dividends going forward are well-secured. Typically, the stock goes up as soon as a split is announced – and the stock tends to hold, and often extend the run-up – hence our love for them as investors.

Knowing that “psychological factors” are often more important than the math itself, we’d also note that it is simply “easier” for a $35 stock (which is still very much a retail owner’s “sweet spot”) to go up 15% ($5.00) than it is for a $70 stock to go up $10 to do so. A Yale finance professor, Kelly Shue, made another excellent point in a recent WSJ article on splits – “positive news feels like a lot bigger deal at a stock with a lower share price.”

We’d also note that the old arguments against stock splits (like high processing and certificate-issuance costs – and the higher brokerage commissions once incurred by smallish retail owners) are largely things of the past. And we’d note too that some of the newer programs that let investors buy fractions of high-priced shares can backfire in a very big  and bad way – by running up proxy-processing fees to service folks that have financially negligible “investments” in the company.

Lastly (and please see the article on this on our website - Our Top-Ten Reasons To GrowAnd To Guard— Your Company’s Retail Investor Base | Optimizer Online A strong base of retail ownership still votes solidly and reliably with management (when it DOES vote) - serves as a strong bulwark to windward when economic times are difficult, which helps to reduce stock-price volatility – and, best of all - lowers a company’s cost of capital.