When is a Stock Split Important?
photo © 2009 Lars Christopher Nøttaasen | more info (via: Wylio)
A couple of days ago I was reading an article by Matt Krantz over at USA Today entitled, “When will Apple’s stock split again?” In it he correctly notes that:
“there’s no real economic gain to a split. Along with the additional shares investors receive after a split, the per-share price is also reduced by an equal percentage.”
Thus, most of the time I really don’t care when a stock splits. However, there are cases where I believe a stock split is important. Apple (AAPL) who has split once is one of these. Google (GOOG) who has never split is another. Both of these stocks are well-known to the general public and carry a relatively high cost per share compared to other stocks. I think that there are people who invest who see the price of Google or Apple and shy away due to the high valuation for psychological reasons (“look how far it could fall”, “look at the volatility”) or simply because buying a single share would actually over-weight their portfolio. Thus, they don’t buy. There is unmet demand out there, but only if shares are trading at a certain level.
I think Berkshire Hathaway (BRK.B) used to be another of these stocks until it split 50:1 on January 21, 2010. In the month and a half after the split Berkshire shares rose 25%. Although some would argue, that its impending addition to the S&P 500 was largely responsible for this increase, I would argue that an additional catalyst was investors like me who always wanted to own the shares but could not afford to add them to our portfolios due to the cost. This is why I purchased a Berkshire share prior to the split and would probably do the same for Google or Apple if they announced a split.