Stocks Splitting Amid Soaring Markets
From trusty blue chips to red-hot tech issues, U.S. companies in record numbers are capitalizing on market euphoria by splitting their shares like Yule logs bound for the holiday hearth.
Investors have responded positively, bidding share prices up even further, and stoking the eye-popping run-up seen on the U.S. stock markets in the last two months.
On Thursday, the three leading gauges of U.S. equities, the Dow Jones industrial average, the Nasdaq composite index and the Standard & Poor’s 500, all closed at record highs in a buying crescendo preceded by two months of voracious stock investing. Nasdaq stocks--technology and Internet names in particular--have frequently split during this time.
Although stock splits add zero liquidity or additional tangible value to investors, they nonetheless broadcast a bullish message that resonates powerfully with investors, experts say. A stock split lowers the price of a company’s shares and usually makes them more attractive to more investors because more people are more likely to buy a $25 stock than one trading at $100 a share.
“I can’t go to the gym or a barber shop without someone telling me they are going to buy a stock because they think it’s about to split,” said Galan Daukas, chief operating officer of Fleet Investment Advisors Inc., a unit of FleetBoston Financial Corp.
Daukas acknowledged he mostly keeps quiet when people talk about splits, but said he occasionally will try to “walk them through the math,” to reveal their insignificance.
“They’re meaningless. It’s like taking a piece of paper and ripping it into two pieces,” he said.
But it is not easy to dispel the seeming magic of stock splits. Wireless phone company Qualcomm Inc. announced a 2-for-1 split on May 10 and a 4-for-1 split three weeks ago. The company’s stock closed Thursday at $466.50 a share, up more than 1,500% this year.
General Electric Co.’s 3-for-1 split on Dec. 17 sent its share price up $3.50 to a then-record close at $151, and the confidence displayed by the global conglomerate sparked a broad market upturn. Thursday, GE’s stock hit an intraday high of $159.19 and then eased to close at $157.50.
Software maker Oracle Corp. watched its shares jump $3.75 to $94.50 after setting a 2-for-1 stock split on Dec. 20. Oracle stock ended Thursday at $106.69.
While stock splits were once a harbinger of good times for a company, they have become more of a management gimmick to jack up share prices, says Robert Stovall of New York brokerage firm Stovall/Twenty-First Advisors.
“Now we have this new era where anything goes,” said Stovall, who described himself as a former fan of stock splits. Also, a higher share price translates into a powerful currency with which to buy other companies, Stovall said. “Investors are the ones that will lose in the end.”
Not all stocks climb post-split. Shares of IBM Corp. surged $4.50 to end at $185.44 in New York Stock Exchange trading on Jan. 26, the day that Big Blue announced a 2-for-1 split. By Feb. 9, IBM’s stock had fallen to $165.88, off $1.13, on investors’ concerns that technology shares were overpriced.
But the story doesn’t end there. By mid-May, IBM’s stock had climbed to a record $245.50 a share and then fell back a bit. On May 26, a day ahead of the effective date of the stock split, IBM shares jumped 7%--or $15.06--to end at a record $236.25. The next day, IBM’s stock price lost $1.94 to end at $116.19--against the backdrop of a 235.23-point drop in the Dow Jones industrial average to a close of 10,466.93. The Dow’s loss of 2.2% was linked to fears of an increase in interest rates and rising international tensions. At that time, it was the Dow’s biggest point loss of the year--and now stands as the Dow’s second-largest point decline in 1999. Thursday, the last day of trading before Christmas, IBM stock closed at $108.63.
As for liquidity, which is an adequate amount of publicly traded equity so that trading itself does not affect a stock’s price, splits do not boost this key market consideration.
Rick Escherich, a managing director at J.P. Morgan & Co., who has advised companies on their stock splits, said that institutional investors, still the force behind the market, do not care about the price of a single share because they think in dollars, Escherich said.
“An institutional investor won’t say ‘I want 500,000 shares.’ They’ll say, ‘I want a million dollars’ worth of stock,’ ” Escherich said.
Market capitalization, calculated by multiplying a company’s outstanding shares by its stock price, is what increases liquidity--the ability to buy and sell a stock easily, Escherich said. And stock splits do not boost market capitalization.
“I would hope that companies are doing this because they are optimistic about the long term, and that investors are bidding up shares because of attractive fundamentals,” Escherich said. But he added that there is a lot of “psychology” in the market, and that can lead to dangerous investment strategies.
Companies should not split their stock to falsely signal positive management expectations, increase liquidity or replace an expected dividend increase, Escherich has advised executives.
Stocks whose shares have split on average outperform the market going forward, said Merrill Lynch’s Silvio Lotufo, who has published studies on the subject. But pinpointing the stocks that split and subsequently underperform is extremely difficult, Lotufo said.
“It’s a risky strategy,” Lotufo said. “It is not that easy just to buy a stock because it has split. The market is more efficient than that.”
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Splitting Up
Stock splits are surging thanks to sharp run-ups, particularly in the technology sector. Some stocks that are splitting, including Internet Capital, China.com and Commerce One, only went public earlier this year. Some recent and upcoming stock splits (stocks in bold have yet to split):
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Ticker Split Thursday Percent Company symbol ratio Payable price gain YTD Sun Microsystems SUNW 2-1 12/7 $75.75 +254% Internet Capital ICGE 2-1 12/10 182.88 +297 Gemstar GMST 2-1 12/13 74.94 +424 China.com CHINA 2-1 12/13 86.00 +163 Exodus Commun. EXDS 2-1 12/14 84.94 +958 IDEC Pharm. IDPH 2-1 12/20 95.31 +306 Commerce One CMRC 3-1 12/23 598.00 +2,747 JDS Uniphase JDSU 2-1 12/29 298.06 +759 Home Depot HD 3-2 12/30 97.13 +59 Inktomi INKT 2-1 12/30 191.50 +196 MCI WorldCom WCOM 3-2 12/30 81.00 +13 Qualcomm QCOM 4-1 12/30 466.50 +1,701
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Sources: Yahoo Finance, Dow Jones, Bloomberg News
