Stock Splits Surge As Market Soars Two-For-One Popular Tune For Likes Of Microsoft, Safeway
If you owned 100 shares of Microsoft on Feb. 6, guess what? You now have 200!
Rite Aid, Safeway and Westpoint Stevens stockholders also have twice as many shares, and those owning America Online, Lucent Technologies and Abbott Laboratories will also see their holdings multiply in weeks ahead.
A bull market gone haywire? Hardly.
What’s been happening since the beginning of last year is an explosion in stock splits. That’s when a company decides to lower its stock price by increasing the amount of outstanding shares.
As of early March, more than 125 companies listed on the major stock exchanges announced they were splitting their stock, according to Standard & Poor’s. A record 235 companies listed on the New York Stock Exchange split in 1997, up 42 percent from the 166 splits the previous year and beyond the prior record 225 splits in 1983, it said.
Most stock analysts believe 1998 will become another record-breaker.
“With the (stock) market reaching new highs on a regular basis, we expect many more companies to split their shares,” Standard & Poor’s said in its weekly investor newsletter, “The Outlook.”
The Dow Jones industrial average has soared more than 600 points, or around 8 percent, since the start of the year.
Splits make a stock more accessible to a larger number of investors in dollar terms, particularly smaller investors, who might have been scared off by the high price of a stock. The proportionate ownership of a company doesn’t change, however, no matter how you slice it.
One hundred shares of a company with a presplit price of $60 is worth $6,000. A 2-for-1 split turns them into 200 shares worth $30 apiece, or $6,000; a 4-for-1 split into 400 shares worth $15 apiece, or $6,000; a 5-for-4 split, 125 shares at $15 each, and so on …
For the more visually bent: It’s like slicing a pepperoni pizza into 16 pieces instead of eight; you get just as filled up on two of the smaller slices as you would one of the previous larger ones.
“It’s a zero-sum game,” said Jay Dunnarama, a vice president for First Albany.
Some companies split many times - Microsoft has split its common stock seven times since going public on March 13, 1986. Others never do - Berkshire Hathaway, a holding company run by Warren Buffet, one of the nation’s richest men, sells at more than $50,000 for its Class A stock.
Dunnarama and other stock analysts say splits are psychologically important to shareholders, not to mention the market in general, because they indicate recent earnings performance has been good, even great. Often times, the announcement of a split is accompanied by an increase in dividends.
“What you’re seeing is an indication that the stock has had a very big run,” said Michael Metz, chief investment strategist for CIBC Oppenheimer Corp. “It’s really a reward that the directors are giving for the success of a company. It’s based on past performance, not future performance.”
There has been some evidence to suggest a strong stock-split trend might signal a future market correction. “Large numbers of splits in 1981, 1983, 1986 and 1989 were followed by downturns in the market the year after,” according to S&P.
But as Dunnarama points out, “You can go back and find evidence both ways.”
What is known for sure, according to a recent S&P study, is that stocks of companies that have declared splits generally outperform the S&P 500 index as they approach their split dates. The biggest gains occur 10 to 20 days before the stock trades on a split basis.
Many times, too, the stock will rise after the split. The lower-priced stock becomes more accessible to more investors, thereby increasing demand that may push the price higher.
Microsoft rose $4 a share to $81.63 on the first day of trading after its 2-for-1 stock split on Feb. 23. Shareholders owning common shares on the Feb. 6 record date participated in the split.
There’s a several-day lapse between the time the split is announced and when it actually takes place, known as the payment day. Furthermore, the Securities and Exchange Commission requires the date of record, the date when shareholders are eligible for the split, be at least 10 days after the announcement. This supposedly gives shareholders time to buy or sell shares if they wish.
Rite Aid’s record date was Jan. 20 and payment date Feb. 2; Safeway’s was Feb. 10 and Feb. 25; Westpoint Stevens, Feb. 16 and March 2. America Online’s dates are Feb. 23 and March 16, Lucent Technologies, March 6 and April 1; and Abbott Laboratories, May 1 and May 29. (All are 2-for-1 splits.)
These dates may seem confusing to individual investors. Many may not even know their stock was split since the action requires no action on the part of the investor.
To stay abreast of the latest in stock splits, investors can visit several Web pages on the Internet. Among them: The Online Investor (www.investhelp.com); Stock Smart (www.stocksmart.com/symchng.html); and 2-for-1 (www.2-for1.com).