Updated: January 13, 2021 by FinPins
What is a stock split?
When companies decide to increase the no. of shares outstanding, the can do so by splitting the stock ‘2 for 1’ or ‘3 for 1’ or in any ratio that they deem fit. In case of a 3 for 1 stock split, a shareholder who owns 100 shares (say for company ABC) valued at $30 each gets 300 shares valued at $10 each after the 3 -1 stock split.
Please note that the total value of the shareholder’s holding does not change due to the stock split, i.e. 100 * $30 = 300 * $10 = $3000.
Effect of Stock Split on Earnings per share (EPS) and Price to Earnings (PE) ratio
Similarly, The earnings per share remain the same, the P/E ratio remains the same. For example if the earnings per share (EPS) for ABC company is $1.00 and there are 100 million shares currently priced at $30 each, PE = 30/1 = 30. After a 3 for 1 split, the number of shares become 300 million priced at $10 each, EPS goes down on $0.33, and PE = 10/0.33 = 30.
Why do companies split stocks?
Companies split their stocks primarily to make the share price affordable to more investors.
“We want Apple stock to be more accessible to a broader base of investors.“-investor.apple.com
“The decision to split the stock was made by Microsoft’s Board of Directors, based on a desire to make our stock more accessible to a broader range of investors“-microsoft.com/en-us/Investor
If the stock price is too high, say $3300 for 1 share of Amazon stock, many people will have to save up $3300 to buy 1 share. This can keep a lot of new and young investors away from investing in the company’s stock. Let’s say if Amazon does a 10 for 1 stock split, the new share price would be $330, making it affordable to many more investors.
The Era of Partial Shares or Fractional Shares
Nowadays you can buy partial shares of many stocks and ETFs. So, the rationale of making the stock accessible by lowering the price per share will become less relevant as more and more brokers offer this feature to their investors. You can buy partial shares on newer platforms such as Robinhood and M1 Finance. Some other brokers such as Fidelity and Schwab are also offering this opportunity to investors.
Companies that have performed stock splits
Many companies have performed splits in the past. A few popular ones are listed below.
|Alphabet (Google parent)|
|Berkshire Hathaway Inc|
|Johnson and Johnson|
|Procter and Gamble|
|United Health Group|
Stock split for Apple
Apple: 5 times, the first (2 for 1) being in June 1987, and the latest (4 for 1) in Aug 2020.
|2 – 1||June 16, 1987|
|2 – 1||June 21, 2000|
|2 – 1||Feb 28, 2005|
|7 – 1||June 9, 2014|
|4 – 1||Aug 28, 2020|
Stock split for Tesla
Tesla: 1 time only, 5 for 1, in Aug 2020.
|5 – 1||Aug 31, 2020|
Stock split for Microsoft
Microsoft: 9 times, the first(2 for 1) being in September 1987, and the latest (2 for 1) in February 2003.
|2 – 1||Sept 18, 1987|
|2 – 1||April 12, 1990|
|3 – 2||June 26, 1991|
|3 – 2||June 12, 1992|
|2 – 1||May 20, 1994|
|2 – 1||Dec 6, 1996|
|2 – 1||Feb 20, 1998|
|2 – 1||March 26, 1999|
|2 – 1||Feb 14, 2003|
Stock Split for Amazon
Amazon: 3 times, the first (2 for 1) being in June 1988, and the latest (2 for 1) in September 1999. With the price per share over $3000 in October 2020, many believe Amazon could split their stock once more.
|2 – 1||June 2, 1988|
|3 – 1||Jan 5, 1999|
|2 – 1||Sept 2, 1999|
What is a reverse stock split?
A ‘reverse stock split‘ is the action taken by a company to consolidate its shares and reduce the number of shares outstanding. If a company performs a reverse stock split, say 1 for 2, a shareholder who owns 200 shares valued at $10 each would get 100 shares valued at $20 each. Please note that here also, the total value of the shareholder’s holding does not change due to reverse stock split, i.e. 200 * $10 = 100 * $20 = $2000.
Reverse stock splits are done mostly when the stock price falls below a certain level, and the company wants to avoid being labelled a risky stock or even a penny stock (in case price falls below $1). The price per share gets an artificial boost and company can avoid the stock being delisted from a major exchange.
Example of a reverse stock split
In June 2003 Priceline (now Booking Holdings BKNG) performed a 1 for 6 reverse stock split. You can read more about it here
Conclusion on Stock Splits and Reverse Stock Splits
The fundamentals of a business determine the long term value of the stock. Increasing or decreasing the no. of shares and proportionately adjusting the price per share is not a true value creator and long term investors shouldn’t be bothered by it.
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