As Stock Splits Bloom, Investors Vote Their Approval
First Internet mania. Now stock-split mania.
Another wave of major and minor companies announced stock splits Tuesday, and investors greeted most of them exuberantly:
* IBM announced a 2-for-1 split, and its shares rose $3.63 to $185.63, continuing to rebound after diving late last week on disappointment over fourth-quarter sales.
* McDonald’s Corp. reported better-than-expected earnings, set a 2-for-1 split, and saw its stock gain $3.06 to $78.94.
* Internet-related companies EBay and Broadcom announced splits of 3 for 1 and 2 for 1, respectively, as they reported quarterly earnings. EBay rose $3.38 to $220.88 and Broadcom shot up $9.25 to $129.50.
* Xerox, which late Monday reported quarterly earnings up 17% amid improved gross profit margins, then set a 2-for-1 split and an 11% dividend increase, rocketed $10.94 to $116.31 on Tuesday.
Stock splits and favorable earnings reports often go hand-in-hand, because earnings usually are the driving force behind higher stock prices. Companies generally split their shares when they reach levels that make them appear less affordable to average investors.
A split is merely cosmetic, of course: In a 2-for-1 split, for example, one share worth $100 becomes two shares worth $50 each. Earnings are simply redistributed, proportionally, over the larger number of shares. There’s no change in the company’s fundamentals.
Still, “investors see stock splits as a reflection of a strong company with upward momentum,” said Arnold Kaufman, editor of Standard & Poor’s Outlook newsletter. “These are stocks that have risen to high levels, indicating business is growing and management is optimistic about the future.”
Part of the appeal of splits is that, rationally or not, many investors prefer lower-priced stocks.
“People may tend to judge shares by an absolute standard,” said Robert Shiller, an economics professor at Yale University. Some investors “have the feeling that $30 [a share] is about right,” and that dramatically higher prices can be an impediment to investing.
For many high-flying Internet stocks, however, the latest splits won’t get prices anywhere near $30--unless the market dives. EBay would be about $74 if its split were effective today.
