Why Some Companies Do Not Split Their Stock
When investors see high share prices, they often wonder whether the companies will split shares, thus putting more shares on the market but at a lower price. When shares split, the company’s overall value remains the same, but a shareholder will double the number of shares in their portfolio, and those shares will trade at half the previous price. For example, a person who holds one share of a company at $100 per share will now hold two shares at $50 apiece. (In some cases, companies will perform a 3:1 split or even divide shares much further.)
Let’s look at some familiar stocks who have seen share prices rise to very high values. We’ll then examine the reasons why a company would choose to split its shares of stock or choose not to.
Amazon – AMZN
In mid August 2018, Amazon was trading at $1,882. The price for shares of the major online retailer has doubled in 2020 alone. Amazon once split its stock regularly, doing so three times in a 15-month span in 1998 and 1999. Back then, shares were trading much lower and dipped to single digits, which may be part of Amazon’s avoidance of stock splits since. Asked in 2017 whether he’d consider a stock split now, Amazon CEO Jeff Bezos did not rule it out but did not indicate another split was imminent.
Booking Holdings – BKNG
Formerly known as Priceline, this travel service company was trading at nearly $2,029 per share at the end of July 2018. This high price is at least in part due to a “reverse” stock split in 2003, in which shareholders received one share for every six they owned. The reverse stock split came after a major market downturn that slammed the company’s share prices to under $1. Thus, there may be some institutional wariness about splitting and allowing prices to get too low. There’s been no indication from management that a stock split will be happening anytime soon.
Netflix – NFLX
Netflix went on a roll in 2018, with share prices rising from $200 to more than $340. At that price, you may think Netflix may be due for a split. But Netflix had underwent a whopping 7-for-1 split in 2015. There is some belief that Netflix could split again, but there is also some skepticism as to whether the company will continue to add subscribers and see revenues rise at the same rate. Investors should not expect another stock split until shares have risen quite a bit further.
Berkshire Hathaway – BRK
Warren Buffett’s company is perhaps the best example of a company that rarely shows a desire to split its shares of stock. Since January 2018, Class A shares have been trading at more than $300,000 apiece. You read that right. But Class B shares, which are more available to everyday investors, have been trading at around $200 during that same time period. Class B shares don’t have the same voting rights as Class A shares and were essentially created as a compromise between Buffett, who did not want to split shares, and investors who wanted to be able to purchase shares at a reasonable price. The company split Class B shares 50-1 in 2010 but has never split Class A shares.
Why Split Stock Shares?
One of the main reasons a company might split its stock is to expand its shareholder base. A split will make shares more affordable for more people, and some companies prefer to avoid seeing their shares concentrated on a small group of people. When shares are spread among more people, an individual can sell most or all of their shares without it having a meaningful impact on the share price. More shares also allow for greater liquidity — that is, shares become easier to buy and sell when there are more on the market. When shares become very expensive, the spread between the “bid” price and the “ask” price can be quite large, thus making trading of stocks harder.
Some companies will split shares simply as a way of getting people to believe share values are rising. An investor may see a company split shares and assume that the company is doing quite well, and thus is worth investing in.
Why Not Split?
There is not a whole lot of evidence to suggest that stock splits matter. Finance professors have examined stock splits and see no actual impact on a company’s value or performance.
Many companies prefer to avoid splitting because they believe a high stock price gives the company a level of prestige. A company trading at $1,000 per share, for example, will be perceived as more valuable even though the firm's market capitalization may be the same as a company whose shares trade at $50.
Smaller companies may also wish to avoid stock splits because of a danger of share values falling too low. There have been cases where companies have split shares only to see the stock market dive, pushing shares below $10. Psychologically, this may turn off some shareholders, and in extreme cases, share prices may be too low for a company to be listed on an exchange. Companies will avoid splitting to protect themselves from this possibility.
Are Splits Necessary Anymore?
Many investors assume that it’s impossible to become a shareholder of a company unless you obtain enough money to buy at least a single share. But that’s no longer the case. There are a number of new platforms and services that allow investors to purchase fractional shares. Stockpile, M1 Investing, Betterment, Motif, and Stash are a handful of apps that have come on the market in recent years to allow investors to get started with small amounts of money.
Moreover, it’s common these days for people to own shares of mutual funds, which give investors exposures to stocks without necessarily owning full shares outright.
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Nasdaq. "Netflix, Inc. Common Stock (NFLX)," Select "5Y." Accessed Aug. 21, 2020.
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